Corporate Income Tax and Dividends: How It Works in Bulgaria 

Corporate income tax, commonly referred to as corporate profit tax, is a fundamental pillar of the tax system in Bulgaria. This legislation is crucial for anyone looking to open a company in Bulgaria to understand. It is designed to ensure that all businesses contribute fairly to the state budget according to their financial success. This tax affects a wide range of entities, including various types of companies, clubs, cooperatives, and unincorporated associations, which are required to pay this tax on the profits derived from their commercial activities. Understanding this tax is essential for effective business planning and financial management.

Legislative Context of Corporate Income Tax

Bulgarian legislation determines that the taxable base for fiscal entities is their accounting profit, which must be adjusted for decreases and/or increases in accordance with relevant laws. The taxation of companies is regulated by the Corporate Income Tax Act (CITA), which outlines how businesses must calculate and pay their taxes. This law ensures transparency and consistency in the application of tax rules across all sectors. It provides detailed guidelines on deductions, exemptions, and tax credits that businesses can leverage to optimize their tax liabilities. The legislative framework is intended to support economic growth by establishing a favorable environment for both local and international investors.

The CITA also stipulates stringent penalties for non-compliance, underscoring the importance of adherence to tax regulations. Businesses must maintain accurate records and submit regular reports to the tax authorities to demonstrate their compliance. This rigorous regulatory environment necessitates that companies engage knowledgeable accountants or tax professionals who can navigate the complex tax landscape effectively.

Applicability of Corporate Income Tax

This tax is applicable to various types of income:

• Profits of local legal entities: all companies registered in Bulgaria are subject to this tax on earnings generated within the country. This includes profits from their core business activities as well as from secondary operations.
• Profits of non-trading local entities: this includes organizations such as religious ones that earn profits through transactions defined by the Commercial Law, as well as from the rental of movable and immovable property. These entities often operate under different rules but are still obligated to contribute to the state budget through this tax.
• Profits of foreign legal entities: foreign companies conducting business in Bulgaria are required to pay corporate income tax on profits generated on Bulgarian territory. This provision ensures that foreign businesses do not gain an unfair advantage over local businesses.
• Profits from gambling activities: earnings from the operations of certified gambling organizers are also subject to taxation. This sector is closely regulated, and the taxes collected are significant contributors to the state’s revenue.

The broad applicability of the corporate income tax underscores its role as a key component of Bulgaria’s fiscal strategy. The government uses this tax to finance public services, infrastructure projects, and social programs that benefit the entire population. By taxing corporate profits, the state can redistribute wealth and foster a more equitable economic landscape.

Read also: Reverse Charge VAT: Why It’s Important for Businesses in Bulgaria

Determination of Corporate Income Tax

The tax is calculated on taxable profit, with a rate of 10%, and the fiscal year coincides with the calendar year. For newly established entities, the fiscal period extends from their incorporation until the end of the calendar year. This uniform tax rate is part of Bulgaria’s efforts to simplify the tax system and make it more predictable for businesses.

For example, if a company earns revenues of EUR 70,000 and expenses amount to EUR 3,000 during the year, the net profit will be EUR 67,000. This profit will be subject to a 10% tax, resulting in a tax due of EUR 6,700 that must be paid to the treasury. This straightforward calculation method helps businesses easily ascertain their tax obligations and plan their financial strategies accordingly.

Company Dividend Tax

The dividend tax is another critical component of the Bulgarian tax system, impacting company owners who wish to distribute profits to themselves. The rate for the dividend tax is 5% on the profit amount after corporate tax has been paid. This lower rate is intended to encourage profit distribution and reinvestment in the local economy.

Calculation example: After paying a corporate tax of EUR 6,700 on a profit of EUR 67,000, the remaining profit is EUR 60,300. A dividend tax of 5%, amounting to EUR 3,015, will apply to this amount. The remainder can be distributed to the company owner as personal net income, amounting to EUR 57,285. This mechanism of taxation on distributed profits aims to balance the fiscal load among shareholders and the company itself.

Read also: How to Register a Company Remotely in Bulgaria

Conclusions

The tax regime in Bulgaria, characterized by relatively low rates and clear legislation, is designed to support economic activity and attract foreign investments. However, it is crucial for businesses to have a thorough understanding of these rules to effectively navigate the tax landscape and maximize the benefits available. Companies must work with qualified tax consultants such as Accountancy Bulgaria, tax advisor in Bulgaria, to ensure they meet all legal obligations and optimize their tax exposure. Through careful planning and compliance, businesses can leverage Bulgaria’s favorable tax environment to enhance their profitability and long-term sustainability.