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. Bulgaria’s flat tax framework is undoubtedly exceptional from an 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 to 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 company’s obligations up to the number of their contributions to the company’s 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 an EEA member state (EU plus Iceland, Liechtenstein, and Norway). Dividends paid by a Bulgarian company to companies and other entities resident in an 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 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 an EU country that doesn’t 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).
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 isn’t 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
A non-Bulgarian resident can (i) become professionally active in Bulgaria and (ii) receive a (high) salary from a Bulgarian company as 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 the 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).
Some individuals are willing to become a Bulgarian taxpayer by relocating to Bulgaria, depending on their professional and personal situation. The advantage of such relocation is that also social security contributions become payable in Bulgaria. The advantage of Bulgaria’s 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).
This article was curated from NoMoreTax.eu Featured Image Credit: Photo by Jack Krier on Unsplash