BTK Doing Business Bulgaria 2011 En

8/3/2019 BTK Doing Business Bulgaria 2011 En

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B A K E R T I L L Y

KLITOU

Doing business in Bulgaria2011

We Share Your Vision


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Preface

This guide has been prepared by Baker Tilly Klitou, an independent member of

Baker Tilly International. It is designed to provide information on a number of

subjects important to those considering investing or doing business in Bulgaria.

Baker Tilly International is one of the world's top ten accountancy and business

advisory networks by combined fee income, and is represented by 150 firms in

120 countries and over 25,000 people worldwide. Its members are high quality,

independent accountancy and business services firms, all of whom are committed

to providing the best possible service to their clients, both in their ownmarketplace and across the world.

Doing Business in Bulgaria has been designed for the information of readers.

Whilst every effort has been made to ensure accuracy, information contained in

this booklet may not be comprehensive and recipients should not act upon it

without seeking professional advice. Facts and figures as presented are correct at

the time of writing.

Up-to-date advice and general assistance on Bulgaria matters can be obtained

from Baker Tilly Klitou. Contact details can be found at the end of this guide.

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March 2011


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Our services include:

1. Audit and Assurance services

2. Accounting services

3. Corporate Financeand BusinessAdvisory services

4. Corporate and Personal Taxation services

Statutory and IFRS audit for companies registered in Bulgaria

Assistance in the preparation of management accounts

Assistance in the preparation of statutory financial statements

Preparation of financial statements in accordance with InternationalAccounting Standards (IAS) and International Financial eporting

Standards (IFRS)

In-house maintenance of clients accounting records

Accounting services at the client premises

Supervision of accounting department

Management consultancy

Mergers and acquisitions

Management buy outsDue diligence and investigations

Capital restructuring and fund raising

Business valuation

Business succession

Strategic planning

Preparation of internal controls evaluation reports

Feasibility studies including cash flow report

Local tax planning for companies and individuals

International tax planning for companies and individuals

Tax compliance in Bulgaria

VAT compliance in Bulgaria

R

Our Services

Doing business in Bulgaria

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5. Consulting Services

Strategy & transformation - Business/functional strategy definition,

Enterprise performance management, Post-deal/curve-out support,Company turnaround

Improving company performance - Revenue enhancement, Costsreduction optimization, Working capital management, Strategic profitimprovement

Improving company capabilities - ERP/CRM/BI implementation support,Organizational redesign, Enterprise functions improvement,Sourcing/outsourcing options support

Solving specific client issues (on demand) such as Regulatory compliancesupport, Growth support for start-ups and established family business,

Interim management

and

and


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Contents

Preface 1

Our Services 2

Contents 4

1 Fact Sheet 5

2 Business Entities and Accounting 8

3 Finance and Investment 11

4 Employment Regulation and Social Security 14

5 Taxation 16

Appendix - Treaties 20

Contact Details 26

2.1 Types of company structure available to foreign investors

2.2 Auditing, accounting and filing requirements2.3 Entities requiring audits

3.1 Exchange control 1

3.2 Banking and sources of finance 1

3.3 Tariffs 1

3.4 Foreign investment incentives/restrictions 1

4.1 Entry visa and work permit requirements 1

4.2 Hiring local employees 1

4.3 Trade Unions 1

4.4 Social Security System 1

5.1 Corporate and individual taxation 16

5.2 Value Added Tax (VAT) 17

5.3 Individual Income Tax 18

5.4 Other taxes that may affect foreign investors 185.5 Treaties for Avoidance of Double taxation 19

5.6 Fiscal reporting environment in Bulgaria 19

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1. Fact Sheet

Geography

People

Location Located on the Balkan Peninsula, Bulgaria is divided into threeparallel east-west zones: the Danubian tableland in the north,the Stara Planina (or Balkan) Mountains in the centre, and theThracian Plain and the Rhodope and Pirin Mountains in thesouth and southwest. About one-third of the country lies at analtitude of 500 meters (1,640 ft.) above sea level. The averageelevation is 480 meters (1,575 ft.) above sea level.

Area 110,987 sq. km.

Land boundaries Bulgaria extends from the western shore of the Black Sea toSerbia and Former Yugoslavian Republic of Macedonia (FYROM)in the west. In the north, the Danube River forms the greaterpart of Bulgaria's common border with Romania. Greece andTurkey lie to the south and southeast of Bulgaria.

Coastline The nature in the Bulgarian Black sea coast is highly varied.130 kilometres is just beach stripes most of which consist offine golden sand. In some places the wind has gathered it inelongated sand dunes, giving the coast a peculiar romance. Therest of the coastline is either high, rocky and the sea surf

founded wonderful forms. There are also low and boggy placeswhere the humid and warm air made it overgrown with plants.In other words the coastline of the Black sea in Bulgaria is areally wonderful place for holiday, recreation, balneology, birdwatching, historical sight- seeing, wreck diving and many otheractivities.

Climate Bulgaria is on the fringe of the humid continental climate zone.The weather varies considerably from year to year, as do theseveral climatic sub zones within the country. Summertemperatures average about 24 C (75 F); winter temperaturesaverage around 0 C (32 F). Annual precipitation averages 63

centimetres (25 in.).Terrain The terrain of the country is varied - predominantly

mountainous, although arable land accounts for approximately41% of the territory.

Time zone GMT + 2 hours

Population The population is 7 563 710 (Dec 2009 est.) (Urbanpopulation: 71.4%).

Ethnic groups Bulgarian 83.9%, Turk 9.4%, Gypsy 4.7%, other 2%.

Religion Bulgarian Orthodox 82.6%, Muslim 12.2%,

other Christian 1.2%, other 4%.Language Bulgarian


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Government

Country name REPUBLIC OF BULGARIA

Government type Parliamentary RepublicUnicameral National Assembly of 240 deputies

Capital The Capital city is Sofia, the other main cities are Plovdiv, Varna,Bourgas and Rousse.

Administrative 28 districts.divisions

Political situation The Constitution of the Republic of Bulgaria was set up in July1991. The Constitution provides a multi-party parliamentarysystem and free elections, in which all the citizens above 18years old of the Republic of Bulgaria are entitled to vote. Afterthe elections, the largest parliamentary group forms theGovernment. General parliamentary majority is required for thenewly elected Government (Council of Ministers) to beapproved. General parliamentary majority is also required for theadoption of legal acts and three quarters majority is required forthe adoption of amendments to the Constitution.

Bulgaria is a Parliamentary Republic and the basic power in thecountry is the legislative one. The Parliament (The NationalAssembly) exercises the legislative power, as well as the right toparliamentary control. The term of office of the NationalAssembly is four years. The National Assembly consists of 240Members of Parliament, who are elected directly on the basis ofproportional representation. The Government (Council ofMinisters) is not directly elected it is elected by the NationalAssembly.

The President is directly elected for a term of five years and canbe elected for a maximum of two terms.

The Government (The Council of Ministers) is the main body ofthe executive power, headed by the Prime Minister. The Councilof Ministers rules and conducts the internal and foreign policy ofthe state, secures public order and national security, exercisescontrol over public administration and the military forces.

The largest parliamentary group nominates the Prime Minister,who receives the mandate to form the Government from thePresident.

Bulgaria was invited to become a member of NATO in 2002.The country joined the alliance in April 2004.

In December 1999 Bulgaria was invited by the EU to startmembership negotiations. In April 2005 the country signed atreaty for accession. As of 1 January 2007 Bulgaria becamemember of the European Union.

The status and powers of the local executive authorities dependon the territory structure of the country. The territory of theRepublic of Bulgaria is divided into regions and municipalities.Bulgaria is made up of 28 regions, each headed by a regionalgovernor, who is appointed by the Government.


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The municipality is the basic administrative and territorial unit ofself-government. There are 263 municipalities in Bulgaria. Thepolicy of every municipality is determined by the MunicipalityCouncil and includes the economic development, theenvironmental and educational policy, cultural activities, etc.The Municipality Council approves the annual budgets anddevelopment plans of the corresponding municipality. Everymunicipality is ruled by a Mayor. The Mayor is in charge of thewhole executive activity of the municipality, of keeping publicorder, and distributing of the municipality budget. The region isthe bigger administrative unit, through which the governmentconducts its local policy in a decentralized and more effectiveway. A regional governor, assigned by the Council of Ministers,rules each region.

The judicial power in Bulgaria is independent. It is built up onthe basis of a procedure of three instances. The SupremeAdministrative Court (SAC) and the Supreme Cassation Court(SCC) exercise control over the implementation of the law by thecourts of lower instances, SAC takes decisions on the legality ofthe executive power's acts. The Constitutional Court determinesif the laws and the international agreements are in compliancewith the Constitution. A Supreme Judicial Council (SJC) hasbeen established, which organizes the activity of the judiciary.

GDP 8 735 BGN (4 466,10 EUR) for 2009GDP growthrate -5.1%for2009;

0%for2010est.;2%for2011exp.(byIMF)

Labour force Labour force (15-64 years) total - 3 204 800 for 2009Male (15-64 years) 1 698 700 /Female (15-64 years) 1 506 100 for 2009Activity rate (15-64 years) 67.2 % for 2009Employment rate 62.6 % for 2009Urban 65.6 %; Rural 53.9 % for 2009

Unemployment 6.8% for 2009;9.7% for 2010 est.; 9.4% for 2011 exp. (by MLSP)

Currency (code) Lev (BGN)(1 EUR = 1.95583 BGN)

- per capital-real

Economy


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2.1

Sole trader

Partnerships

Limited Liability Company and joint stock company

Types of company structure available to foreign investors and the keycharacteristics of each.

Foreign persons can do business in Bulgaria without incorporation through apermanent establishment. Under Bulgarian law they can also use the followingforms of commercial business organizations:

Under Bulgarian law, the sole trader is not a legal entity separate from its owner,

who is fully liable to his/her creditors with all his/her personal assets.

The Bulgarian Commercial Act recognizes the following types of partnerships:

General partnership the partners are fully and jointly liable for the entity'sliabilities.

Limited partnership some partners are fully and jointly liable for the entity'sliabilities and the remaining partners are liable up to the value of their sharecontribution.

Partnership limited by shares this is a mixture between limited partnershipand joint stock company.

The limited liability company / OOD / is most widely used among investorsbecause of the minimum capital requirements, the simplicity of the corporategovernance system and the less administrative procedures for its operation.However, there are statutory required qualified majorities or unanimity for transferof shares, acceptance of new shareholders and capital changes, which maydecrease the flexibility of the company's operations. Two or more shareholders, or

only one in the case of sole owner limited liability company (EOOD), mayestablish a limited liability company, or a sole owner limited liability companyrespectively. Shareholders in an OOD may be Bulgarian, foreigners, or legalentities. The sole owner of the capital exercises the powers of the general meetingof the shareholders and he/she manages and represents the company before thirdparty, unless a manager is appointed by him/her. The minimum required capitalfor a limited liability company is BGN 2. It must be divided into shares of valuenot less than BGN 1.

The joint stock company / AD / is another widely used type of businessorganization. It is preferred because of the lack of statutory restrictions on the

transfer of shares and the absence of personal engagement of the shareholders inthe operation of the company. The registered capital of a joint stock companycannot be less than BGN 50,000 and it must be divided into shares of a facevalue not less than BGN 1. Higher minimum capital is required for establishing

2. Business Entities and Accounting


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companies in the form of an AD, or an EAD respectively, where specialcommercial activities are to be performed, such as banks and insurance

companies. All shares shall have equal face value and are tradable instruments.The types of shares that a joint stock company may issue are: (i) registeredshares; (ii) bearer shares, as well as (iii) preference shares. In general, restrictionson the transfer of any type of shares may be provided for in the by-laws of thecompany. Only joint stock companies may be registered as public companies.

Any merchant, including foreign legal entities registered as merchants under theirnational law, as well as foreign natural persons, which are not legal entities, ifregistered as having a right to perform commercial activity under their national

law, may register a branch as a form of business establishment under theCommerce Act.

A trade representative office is incorporated by way of registration into thecommercial register with the Bulgarian Chamber of Commerce and Industry(BCCI). Any foreign person who has the right to carry out commercial activitiesunder his national law may register a trade representative office in Bulgaria underthe Encouragement of Investments Act (EIA). A TRO is not a separate legal entityand it may not carry out business activities. Thus, a TRO is meant to carry out

non-proprietary activities for the purposes of performing promotions, exhibitions,demonstrations, training or advertising of products or services, etc. Consequently,in general a TRO does not generate income and is not subject to corporateincome taxation in Bulgaria.

Two or more persons can conclude a joint-venture agreement in order to combinetheir efforts for the achievement of a mutual business objective. Joint ventures arenot legal entities but unincorporated partnerships.

This is a legal entity, representing a voluntary association for business activities ofat least seven individuals.

This is a group of traders united to perform a certain activity. It could be organizedeither as a commercial company (e.g. Limited Liability Company or Joint StockCompany) or as a joint venture.

All companies and sole traders in Bulgaria are obliged to keep accounting booksand records and to prepare annual financial statements. The primary accountancydocuments of the entities should be drawn up in Bulgarian language with Arabic

Branch

Trade Representative Office (TRO)

Joint Ventures

Co-operative society

Consortium

2.2 Auditing, accounting and filing requirements (including language

and currency requirements)


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figures and in levs. They can also be drawn up in the respective foreign languagein foreign currency for the transactions contracted in foreign currency with foreign

contractors. The accountancy documents received by the entities in a foreignlanguage should be accompanied by a translation into Bulgarian of the contentsof the operations indicated in them.

Under the Accountancy Law, the following business entities must preparefinancial statements on the basis of IFRS:

Credit institutions, investment, and insurance companies, pension assurancecompanies and the pension funds managed by them.

Companies issuing securities as per the Bulgarian Public Stock Offering Law.

Annual financial statements must be prepared and presented on the basis of the

National Financial Reporting Standards for Small and Medium-sized Enterprises.Small and medium-sized enterprises are those which, for at least one of the twopreceding years do not exceed the indicators under two of the following criteria:

Balance sheet assets of 31 December BGN 8.000.000

Net income from sales for the year BGN 15.000.000

Average number of personnel for the year 250 employees

Small and medium-sized companies may choose to prepare and present theirfinancial statements either on the basis of IFRS or on the basis of the FinancialReporting Standards for Small and Medium-sized Enterprises. An enterprisewhich has, in one reporting period, prepared and presented its annual financialstatements on the basis of IFRS cannot apply the National Financial ReportingStandards for Small and Medium-sized Enterprises.

The annual financial statements of the following entities shall be subject toindependent financial audit, unless otherwise provided by the law:

Joint stock companies and partnerships limited by shares;

Enterprises issuing securities as per the Bulgarian Public Stock Offering Law;

Credit institutions, investment and insurance companies, pension assurance

companies and the pension funds managed by them;Enterprises for which this requirement is established by law;

All enterprises not mentioned in items 1-4 hereof, with the exception ofenterprises applying a simplified form of financial reporting and budget- fundedenterprises. Enterprises applying a simplified form of financial reporting arethose which over the current or the previous year do not exceed the indicatorsunder two of the following criteria:

Balance sheet assets of 31 December BGN 1.500.000

Net income from sales for the year BGN 2.500.000

Average number of personnel for the year 50 employees

2.3 Audit requirements


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3. Finance and Investment

3.1 Exchange control

3.2 Banking and sources of finance

The national currency is the Bulgarian lev, and it is designated as BGN

With the introduction of a Currency Board Arrangement in 1997, all restrictionson trade in hard currency in the country were removed. Domestic banks may sellhard currency to natural persons or legal entities without any restrictions.

Each foreigner or Bulgarian may open and hold an unlimited number of bankaccounts, in any kind of currency, with any bank in Bulgaria. No restrictions

whatsoever apply to the repatriation of profits, capital, royalties and interest.Exchange control regulations are based on the principle of freedom to act, transactand pay.

Resident and non-resident individuals may transfer money up to EUR 10,000inclusive or their equivalent in a foreign currency freely, without declaring theseamounts to the customs authorities. Any amounts in excess of EUR 10,000 ortheir equivalent in a foreign currency must be declared to the customs authorities.When BGN 25,000 or their equivalent is transferred abroad, they must bedeclared and justified. Foreigners have the right to transfer any amount in excess

of the limit set by the Bulgarian law as they have declared upon entry into thecountry.

The Bulgarian National Bank (BNB), established in 1879, is the Central Bank ofBulgaria. The BNB has the exclusive right to issue banknotes and coins inBulgaria. The BNB is financial agent of the Government. The Bulgarian NationalBank regulates and supervises the banking sector aiming at the stability of thebanking system. The Bank grants banking licences conducts on-site inspectionsand collects data from commercial banks. Non-bank financial institutions, such

as financial houses, are also subject to licensing and supervision by the Bank.The BNB controls commercial banks' trade in and settlement of Governmentsecurities. The Bank administers the Government Securities Depository andmonitors the activities of the Central Depository.

Thirty commercial banks (including 6 branches of foreign banks) are nowoperating in the Bulgarian market. The market is dominated by the 10 largestbanks which control almost 79% of the total assets of the banking system. Theten banks are UniCredit Bulbank, DSK Bank, First Investment Bank,Raiffeisenbank Bulgaria, Eurobank EFG Bulgaria, United Bulgarian Bank, SGExpress Bank, Piraeus Bank, Alpha Bank and Corporate Commercial Bank.


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3.3 Tariffs

Custom duties

Excise duty

3.4 Foreign investment incentives/restrictions

Customs duties are payable upon the importation of goods and products toBulgaria. Bulgaria is a member of the World Trade Organization. The Bulgariancustoms legislation is harmonized with European Community Customs Policy. Theimports of products are subject to customs duties at rates determined in theCustoms Tariff approved by the Government. The customs tariff codes aregenerally based on the International Harmonized Commodity Description andCoding System (IHCDCS). As from 1 January 2007, Bulgaria is applying the EUcustoms legislation directly. The customs value is accumulated on a percentagebasis of the transaction value plus certain costs.

Excise duty is levied by producers and importers of goods listed in the BulgarianExcise Tariff. These inter alia include: alcoholic beverages, tobacco products,electricity, gasoline, etc.

The Bulgarian constitution and the Encouragement of Investments Act providethat foreign investors are entitled to perform economic activity in the countryunder the same provisions applicable to Bulgarian investors, except where

otherwise provided by law.

The Encouragement of Investments Act is applied in respect of initial investmentin material and immaterial assets and the new labour units related thereto. Theseinvestments should meet the following conditions:

they must related to the setting-up of a new establishment, the extension of anexisting establishment, diversification of the output of an establishment intonew additional products or a fundamental change in the overall productionprocess of an existing establishment;

they must be undertaken in specific sectors of economic activity;

at least 80% of the future general income must be generated from products ofthe specific sectors of economic activity;

they must be completed up to 3 years as of the date of issuance of aninvestment class certificate;

they must exceed the minimum amount which is specified by the Rules on theenforcement of the Encouragement of Investments Act;

at least 40% of the eligible costs of the investment must be provided eitherthrough investor's own resources or by external financing in a form which isfree of any public support;

the investment must be maintained in the recipient region for at least 5 years

after the date of completion;other conditions according to the effective legislation regarding state aid


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Investments are also encouraged according to the provisions of the CorporateIncome Taxation Act through corporate tax reduction, the Value Added Tax Act

through VAT exemption for certain investment projects and the Encouragement ofEmployment Act.

Generally investments are encouraged when investor who received the investmentclass certificate holds at least 75% of the registered capital.

The Invest Bulgaria Agency provides special institutional help such as generalinformation and individual administrative services upon request.


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4. Employment Regulation and Social Security

4.1 Entry visa and work permit requirements

4.2 Hiring local employees

A European Union resident must have an identity card or passport in order to stayin the Republic of Bulgaria up to three months. A family member who is notEuropean Union citizen can stay in the Republic of Bulgaria with passport withina term of up to three months from the date of entry in the country. EuropeanUnion citizens can stay permanently in the Republic of Bulgaria after obtainingthe appropriate permission or they can stay for durable residence for a period of 5years after obtaining the appropriate permission.

Foreign citizens are authorized to work on the territory of Bulgaria after theobtaining of a work permit from the National Employment Agency (NEA). Workpermits are delivered for a job which requires special knowledge and skills andonly if the local labour market does not have local individuals with similar skills.Work permits can only be issued on the request of the employer - natural or alegal person registered according to the Bulgarian legislation or on the request of alegal person registered according to the Bulgarian legislation which is in acompany agreement with the employer of the foreigner.

The necessary documents have to be filed in the Labour office where the foreigner

works.Foreigners non EU/EAA or Swiss citizens have the right of employment on theterritory of Republic of Bulgaria when:

Hired by employer in accordance with the Labour Codex;

Commissioned for a particular term by a foreign employer within theframework of offering services to the Republic of Bulgaria;

To be self-employed.

Foreign citizens' employment in Republic of Bulgaria is regulated in theEmployment Promotion Act and related sub-legal acts of the Council of Ministers.

Employment could be performed only after the issue of

. Foreigners EU/EAA or Swiss citizens and members of their familiescan work in Bulgaria without the issue of NEA Work Permit.

The labour code sets the relations between employers and employees. Every timea company hires a new employee, the labour contract has to be submitted in theNational Revenue Agency.

NEA Work Permit. Theduration of the work permit is one year. It can be extended for a new period ifrequired


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4.3 Trade Unions

4.4 Social security system

Trade unions in Bulgaria are legally recognized as representatives of workers in

many industries. The largest unions are among public sector employees such asteachers and police. Trade unions collectively bargain wages, benefits, workingconditions for their members. They also represent their members if employersattempt to violate contracts.

* The contribution for the Occupational Accident and Disease Fund rangesbetween 0.4% and 1.1% depending on the group of economic activity thecompany falls into per the National Classification of Economic Activities

** Additional mandatory Social Insurance Fund - none for employees bornbefore 01.01.1960 and 5% for employees born after 31.12.1959.

*** The burden of social security contributions is shared between the employerand the employee as follows:

Sickness and Maternity Leave Fund, Unemployment Fund, and HealthInsurance Fund - 60:40 ratio (employer : employee);

Pension Fund:

for employees born before 1st of January, 1960 - 9.9%-7.9%(employer-employee);

for employees born before 1st of January, 1960 - 7,1%-5,7%(employer-employee);

Additional Mandatory Social Insurance Fund - only for employees bornafter 1st of January, 1960 - 2.8%-2.2% (employer-employee);

Occupational Accident and Disease Fund and Employees' receivablesguarantee fund - 100%-0% (employer pays it all).

The maximum income for which payroll contributions are paid is BGN 2000.

Social security contributions:1. Pension fund 12,8% 17,8%

2. Sickness and Maternity Leave Fund 3.50% 3.50%

3. Occupational Accident and Disease Fund* 0.40%-1.10% 0.40%-1.10%

4. Unemployment Fund 1.00% 1.00%

5. Additional Mandatory Social Insurance Fund** 5.00% -

6. Health Insurance Fund 8.00% 8.00%

7. Employees' receivables guarantee fund 0% 0%

Total*** 30.70% 30.70%

Payroll contributionsEmployees

born after 1 ofJanuary, 1960

stEmployees

born before 1 ofJanuary, 1960

st


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5. Taxation

5.1 Corporate and individual taxation.

New Corporate Income Tax Act (CITA) is effective from 1 January 2007. Apartfrom corporate income tax which is charged on corporate profits, CITA alsoregulates other taxes, such as: special income tax regimes applicable to gamblingbusinesses and certain investment companies, taxes on corporate expenses,withholding tax obligations of corporate taxpayers with respect to dividenddistributions and payments due to non-resident contractors.

From 2007 onwards, corporate income tax in Bulgaria applies at a uniform rate of10%.

Bulgarian companies are subject to Bulgarian tax on their worldwide profits.Companies that are non-residents in Bulgaria, but operate in Bulgaria through abranch, office, agency or other form of a permanent establishment are only liableto tax on profits generated through their Bulgarian establishment. Generally, acompany is resident in Bulgaria if it is registered in Bulgaria. Most of the taxationrules, including the major rules relating to tax incentives, apply equally to residentand non-resident corporations conducting activities through a Bulgarianpermanent establishment.

Withholding tax at 5% is deducted from the following dividend distributions byBulgarian resident companies:

Dividends distributed to Bulgarian resident individuals

Dividends distributed to non-resident individuals and legal entities.

From 1 January 2011, a 10% withholding tax will apply to service fees,remuneration for the use of rights and penalty or damages payments accrued byBulgarian resident entities to foreign legal entities based in low tax jurisdictions.

From 1 January 2011 a lower withholding tax rate of 5% will apply to interestand royalties accrued by Bulgarian legal entities to EU based related parties underthe following condition:

The income recipient is a foreign legal entity from an EU Member or apermanent establishment of a legal entity from an EU Member State in anotherEU Member State and

The payer of the income local legal entity or a permanent establishment inBulgaria and the foreign legal entity - recipient of the income are related.

The above pursuant to the requirements of European Directive 49 of year 2003 ofthe European Council, which states that members of European Union are notentitled to levy interests and royalties paid between foreign companies - related

parties. Bulgaria and Romania have negotiated a transitional period from 2011 till2014 when the tax rate shall be 5 % and as from 2015 the tax rate shall be 0%.


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The 10% withholding tax rate will continue to apply to interest and royaltiesaccrued to entities other than EU based related parties.

Dividends distributed to Bulgarian resident corporations are not subject towithholding tax. From the January 1, 2009, the dividends distributed tocorporation residents in the EU and the EEA are also exempted from withholdingtaxes. No tax is charged on the remittance of the profits of branch offices or non-residents. Therefore, no withholding obligations apply to transfers of profits ofBulgarian branches or permanent establishments of non-residents.

Bulgarian tax depreciation is applied on a straight-line basis as illustrated below:

* The annual depreciation rate applicable for the assets of category II shall notexceed 50% where the following conditions are simultaneously met:

The assets are part of an initial investment;

The assets are new and have not been used before their acquisition. If theassets are acquired for the purpose of energy efficiency investments, the

Bulgarian tax law does not require the first condition for initial investmentto be met.

VAT is charged at each level of sale of goods and services in the course ofbusiness and is borne by the ultimate customer. The standard VAT rate is 20%.

The limit of compulsory VAT registration is BGN 50 000 within a period of 12months. The VAT compulsory registration requirement shall apply to each taxableperson who affects a supply of goods whereof the place of transaction is within

the territory of the country under the terms of distance selling.

5.2 Valued Added Tax (VAT)

Asset Categories Annual Depreciation Rates

I. Fixed buildings, including buildings held asinvestment property, facilities, communication devices,electricity carriers, communication lines 4%

II. Machines, manufacturing equipment and apparatus 30% or 50%

III. Transportation vehicles excl. automobiles, coverageof roads and aircraft runways 10%

IV. Computers, peripheral devices, software andthe right to use software 50%

V. Motor vehicles 25%

VI. Intangible and other tangible assets which are

legally protected for a limited period of time annual rate cannotexceed 33 1/3)

VII.All other depreciable assets 15%

100/years of the time period

of the legal protection (but the


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5.3 Individual Income Tax

5.4 Other taxes that may affect foreign investors

Real estate tax

New Law on taxes on insurance premiums, which is in force as from 1st

January, 2011

Bulgarian income tax is charged to individuals who are Bulgarian tax residents, as

well as to non-residents who earn income from sources in Bulgaria. Bulgarianresidents are defined as individuals who have permanent domicile in Bulgaria,who have stayed in Bulgaria for a period of over 183 days in any 365 day periodstarting or expiring in the calendar year or whose centre of vital interests is inBulgaria. Where a Double Tax Treaty applies, the residency status could beimpacted by the provisions of the Treaty.

Bulgarian residents are subject to tax on their worldwide income fromactivities/investments in Bulgaria or abroad. Non-residents are taxable in Bulgariafor activities and investments related to Bulgaria. Bulgarian law contains detailedrules on when an activity or investment is sufficiently related to Bulgaria to besubject to Bulgarian taxation.

From January 2011 individuals, established in the designated offshore areas withlow tax jurisdictions, shall be levied with 10% withholding tax on fees, receivedfor services or rights that are not proved as actually provided, and on penaltiesand compensations of any kind, except those received pursuant to insurancecontracts.

In general, individual income tax is 10 % flat tax rate over the taxable annualincome. Certain items of income of residents or non-residents are not included inthe taxable annual income and are subject to special rules of taxation with respect

to the rates and the basis for tax.

Owners of real properties (built up land, non-built construction plots andbuildings) are subject to real estate tax on an annual basis. Non residential landand forests are not subject to tax. The buildings of farmers for use in theiragricultural business are also exempt from tax. The specific tax rate is stipulatedby the municipal council (of the municipality in which the real estate is located)

within the interval 0.01 % - 0.45% and is charged on the higher between thebook value of each property as at 1 January of the respective year (for businessproperties of entities) and the tax valuation of the property (for residentialproperties of business entities and properties of individuals).

The Law on tax on insurance premiums regulates levying of tax on insurancepremiums under taxable insurance contracts. This tax is due by the insurer andshould be paid to the budget every month on the date of receipt of the premium.

The tax rate is 2 %.


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5.5 Treaties for Avoidance of Double taxation

5.6 Fiscal reporting environment in Bulgaria

Bulgaria is a member to sixty-six bilateral double tax treaties which provide for a

relief of tax or a reduced rate of tax. The multilateral COMECOM treaty could stillapply to some former USSR countries (such as Kyrgyzstan, Tajikistan,Turkmenistan). Broad information on the withholding system of taxation onstraightforward charges is provided in the

The financial year in Bulgaria coincides with the calendar year and ends on31 December.

Enterprises prepare and submit to the National statistical Institute and tax

authorities annual financial statements by 31 March of the following year. Parentcompanies shall prepare and present consolidated financial statements by31 March of the following year.

Companies registered and re-registered in the Trade register should publish theirannual financial statements, approved by the shareholders, by 30th June of thefollowing year.

Annual financial statements subject to independent audit by registered auditorsand approved by the shareholders should be published in the media,accompanied by the auditor's report, by 30th June of the following year.

Appendix on pages 19 to 24.

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Income Paid from Bulgaria


Albania 5 15 25 10 10

Algeria 10 10 0 10 10

Armenia 5 10 0 10 10

Austria 0 0 0 0 0

Azerbaijan 8 8 0 7 10

Belarus 10 10 0 10 10

Belgium 10 10 0 10 5

Canada 10 15 10 10 10China 10 10 0 10 10

Croatia 5 5 0 5 0

Cyprus 5 10 25 7 10

Czech Republic 10 10 0 10 10

Denmark 5 15 25 0 0

Egypt 10 10 0 12.5 12.5

Estonia 0 5 10 5 5

Finland 0 0 0 0 5

France 5 15 15 0 5

F.Y.R.O.M 5 15 25 10 10Georgia 10 10 0 10 10

Germany 15 15 0 0 5

Greece 10 10 0 10 10

Hungary 10 10 0 10 10

India 15 15 0 15 15

Indonesia 15 15 0 10 10

Iran 7.5 7.5 0 5 5

Ireland 5 10 25 5 10

Israel 7.5 7.5 0 10 7.5

Italy 10 10 0 0 5

Japan 10 15 25 10 10

Jordania 10 10 0 10 10

Kazakhstan 10 10 0 10 10

Korea 5 10 15 10 5

Democratic People's

Republic of Korea 10 10 0 10 10

Kuwait 0 5 25 5 10

Kyrgyzstan 0 0 0 0 0

Latvia 5 10 25 5 5Lebanon 5 5 0 7 5

Lithuania 0 10 10 10 10

Luxembourg 5 15 25 10 5

(1)

(21)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

Country Divident

SubstantialShareholding

Interest Royalties

Non-Substantial

shareholding

Percentageof Substantialshareholding

Rate Rate

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Income Paid from Bulgaria

Country Divident


Interest Royalties

Non-Substantial

shareholding


Rate Rate

Malta 0 0 0 0 10

Moldova 5 15 25 10 10

Mongolia 10 10 0 10 10

Morocco 7 10 15 10 0

Netherlands 5 15 25 0 0

Norway 15 15 0 0 0

Poland 10 10 0 10 5

Portugal 10 15 25 10 10Romania 10 15 25 15 15

Russia 15 15 0 15 15

Republic of

South Africa 5 15 25 5 5

Singapore 5 5 0 5 5

Slovakia 10 10 0 10 10

Slovenia 5 10 25 5 5

Spain 5 15 25 0 0

Sweden 10 10 0 0 5

Switzerland 5 15 25 10 0Syria 10 10 0 10 18

Tajikistan 0 0 0 0 0

Thailand 10 10 0 15 15

Turkey 10 15 25 10 10

Turkmenistan 0 0 0 0 0

UK 10 10 0 0 0

Ukraine 5 15 25 10 10

United Arab Emirates 5 5 0 2 5

USA 5 10 10 5 5

Uzbekistan 10 10 0 10 10

Vietnam 15 15 0 10 15

Yugoslavia (Serbia

& Montenegro) 5 15 25 10 10

Zimbabwe 10 15 25 10 10

(10)

(11)

(12)

(13)

(14)

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Income Paid to Bulgaria

Albania 5 15 25 10 10

Algeria 10 10 0 10 10

Armenia 5 10 0 10 10

Austria 0 0 0 0 0

Azerbaijan 8 8 0 7 10

Belarus 10 10 0 10 10

Belgium 10 10 0 10 5

Canada 10 15 10 10 10China 10 10 0 10 10

Croatia 5 5 0 5 0

Cyprus 5 10 25 7 10

Czech Republic 10 10 0 10 10

Denmark 5 15 25 0 0

Egypt 10 10 0 12.5 12.5

Estonia 0 5 10 5 5

Finland 10 10 0 0 5

France 5 15 15 0 5

F.Y.R.O.M 5 15 25 10 10Georgia 10 10 0 10 10

Germany 15 15 0 0 5

Greece 10 10 0 10 10

Hungary 10 10 0 10 10

India 15 15 0 15 15

Indonesia 15 15 0 10 10

Iran 7.5 7.5 0 5 5

Ireland 5 10 25 5 10

Israel 7.5 7.5 0 10 7.5

Italy 10 10 0 0 5

Japan 10 15 25 10 10

Jordania 10 10 0 10 10

Kazakhstan 10 10 0 10 10

Korea 5 10 15 10 5

Democratic Peoples

Republic of Korea 10 10 0 10 10

Kuwait 0 5 25 5 10

Kyrgyzstan 0 0 0 0 0

Latvia 5 10 25 5 5Lebanon 5 5 0 7 5

Lithuania 0 10 10 10 10

Luxembourg 5 15 25 10 5

(1)

(21)

(2)

(3)

(5)

(6)

(7)

(8)

(15)

(9)

Country Divident


Interest Royalties

Non-Substantial

shareholding


Rate Rate


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Income Paid to Bulgaria

Country Divident


Interest Royalties

Non-Substantial

shareholding


Rate Rate

Malta 30 30 0 0 10

Moldova 5 15 25 10 10

Mongolia 10 10 0 10 10

Morocco 7 10 15 10 0

Netherlands 5 15 25 0 0

Norway 15 15 0 0 0

Poland 10 10 0 10 5

Portugal 10 15 25 10 10Romania 10 15 25 15 15

Russia 15 15 0 15 15

Republic of

South Africa 5 15 25 5 5

Singapore 5 5 0 5 5

Slovakia 10 10 0 10 10

Slovenia 5 10 25 5 5

Spain 5 15 25 0 0

Sweden 10 10 0 0 5

Switzerland 5 15 25 10 0Syria 10 10 0 10 18

Tajikistan 0 0 0 0 0

Thailand 10 10 0 15 15

Turkey 10 15 25 10 10

Turkmenistan 0 0 0 0 0

UK 10 10 0 0 0

Ukraine 5 15 25 10 10

United Arab Emirates 5 5 0 2 5

USA 5 10 10 5 5

Uzbekistan 10 10 0 10 10

Vietnam 15 15 0 10 15

Yugoslavia (Serbia

& Montenegro) 5 15 25 10 10

(16)

(11)

(17)

(18)

(12)

(13)

(19)

(20)

1. The major rate applies if the recipient holds directly at least US$40,000 (orequivalent in the respective national currency) of the capital of the companypaying the dividend.

2. This rate applies to all royalties except those paid for the use of or right touse industrial, commercial and scientific equipment, for which the rate is7%.

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3. The withholding tax rate on royalties is 10%. However, under the provisionsof the treaty, 10% rate would not apply on royalties paid to a Cypriot

resident/company by Bulgarian resident/company in case at least 25% of theCypriot resident/company assets are owned (directly or indirectly) by theBulgarian resident/company. Hence, such royalties would be subject to 10%withholding tax.

4. In contrast, a dividend paid by a resident company of Finland to a Bulgarianresident shall be subject to 10% tax in Finland.

5. Bulgaria and Greece signed a double tax treaty on 15 February 1991 andprotocol on 18 July 2000 both of which are effective from 1 January 2002.The protocol took effect at the same time as the treaty.

6. Under the treaty the rate is 20%; the non-treaty rate applies when it is lower.The rate is 15% for copyright royalties for literature, art or science (otherthan cinematograph films or tapes) used for television or radio programmes.

7. Under the treaty the dividend and royalty withholding tax is capped at 50%of the domestic rate subject to a maximum of 12.5% and a minimum of7.5%. Interest withholding tax is limited to 10%, reduced to 5% in the caseof banks and financial institutions.

8. According to the Bulgarian Ministry of Finance the COMECON treaty is heldto still be effective with regard to Kyrgyzstan, Tajikistan and Turkmenistan.Whether this position will be reciprocated is uncertain with regard to some of

these countries and further advice should be sought from Baker Tilly Klitouand Partners in Sofia, Bulgaria on a case-by-case basis.

9. The non-treaty rate applies if the recipient is a Luxembourg 1929 holdingcompany.

10. When dividends are paid from a resident of Malta to a Bulgarian resident thewithholding tax shall not exceed 30% of the dividends paid or the profit taxcharged on the profits from which the dividends are paid in accordance withthe Development of Industry Decree as of 1959.

11. Under the treaty the rate is 5%. However, under the Protocol to the treatyroyalties are exempt from tax as long as under Netherlands tax law the

Netherlands does not levy tax at source on royalties.

12. Under the treaty the rate is 5%. However, under the protocol to the treatyroyalties are exempt as long as Switzerland does not levy tax at source onroyalties.

13. Under the treaty the withholding tax on royalties is 18%, however if lower anon-treaty rate shall apply.

From 1 January 2008 the Bulgarian tax law (the amended CITA) providesfor a reduced tax rate of 5 % of the withholding tax to be imposed on thedividend income. Therefore, as from 1 January 2008 the taxation of

dividend income under the domestic law is more favourable that the oneprovided for under the DTT, there will be no need for the application of DTTin respect to this type of income and the Bulgarian law shall be applied.


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14. The double tax treaty with USA is entered into force 15 December 2008.

According to the Treaty when dividends are paid from Bulgarian companiessimilar to US RIO (Regulated Investment Company) or REIT (Real EstateInvestment Trust) specific rules apply. Such Bulgarian companies will bespecified by the competent authorities.

The treaty provides for a tax exemption for cases when the beneficialowner of the dividends is a pension fund that is resident of either state.

The treaty provides for a tax exemption for cases when the beneficialowner of the interest is a financial institution or a pension fund that isresident of either state.

15. The rate is 7% for copyright royalties for cinematographic films, films ortapes used for television or radio broadcasting, patents, trademarks, designsor models, plans, secret formula or process.

16. The rate for royalties is 10%.

17. 5% is the rate for copyright royalties and other similar payments in respect ofthe production or reproduction of any cultural, dramatic, musical or otherartistic work (but not including royalties in respect of motion picture filmsand works on film or videotape or other means of reproduction for use inconnection with television) as well as for royalties paid for the use ofindustrial, commercial or scientific equipment. 10% is the rate in all other

cases.18. 5% is the rate for copyright royalties for the use or the right of use of literary,

artistic or scientific work (excluding cinematographic films) as well as forroyalties for the use of industrial, commercial or scientific equipment. 10%is the rate in all other cases.

19. The interest is taxed at 10% in case the interest is received by financialinstitution. 5% is the rate for royalties for the use of any copyright of literary,artistic or scientific work, including cinematograph films and films, tapes ordiscs for radio or television broadcasting.

20. When dividends are paid from US RIO (Regulated Investment Company) or

REIT (Real Estate Investment Trust) specific rules apply.

21. 5% is the rate for royalties paid for patents, designs or models, plans, secretformula or process, or for information concerning industrial, commercial orscientific experience (know-how).

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Contact Details

For further information about our firm and the services provided you may contactthe local partners at one of the following offices:

Moldova

Chisinau Office:

33 Ismail Boulvd2nd Floor, Office 204Chisinau - MoldovaTel: +373 22 233003Fax: +373 22 234044Email: [email protected]: www.bakertillyklitou.md

Cyprus

Nicosia Office:

11 Bouboulinas Street1060 NicosiaP.O. Box 27783

2433 Nicosia - CyprusTel: +357 22458500Fax: +357 22751648Email: [email protected]: www.bakertillyklitou.com

Limassol Office:

Clerimos Building, 1 2 Floors163 Leontiou Street3022 Limassol

P.O. Box 573283314 Limassol - CyprusTel: +357 25591515Fax: +357 25591545Email: [email protected]

st nd&

Larnaca Office:

Lumiel Building, Office 30161-63 Lordou Vironos Street6023 LarnacaP.O. Box 409236308 Larnaca - CyprusTel: +357 24663299Fax: +357 24662910Email: [email protected]

Romania

Bucharest Office:

52 Splai Independentei5th DistrictBucharest - RomaniaTel: +40 21 3156100Fax: +40 21 3156102Email: [email protected]: www.bakertillyklitou.ro

Bulgaria

Sofia Office:

:

104 Akad. Ivan E. Geshov BoulvdEntrance A, 7 FloorSofia 1612 - Bulgaria

Tel: +359 2 9580980Fax +359 2 8592139Email: [email protected]: www.bakertillyklitou.bg

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This publication has been prepared for general guidance on matters of interest only, and does not constituteprofessional advice. Do not act upon the information contained in this publication without obtaining specificprofessional advice. No representation or warranty (express or implied) is given as to the accuracy or

completeness of the information contained in this publication. o the extent permitted by law, Baker TillyKlitou and Partners Ltd, its members, employees and agents do not accept or assume any liability,

responsibility or duty of care for any consequences of anyone acting, or refraining to act, in reliance on theinformation contained in this publication or for any decision based on it.

Designed by: Monica Lamprou, Demonix Design ServicesPrinted by: Chr. Nicolaou & Sons Ltd

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BTK Doing Business Bulgaria 2011 En