Tax relief measures are essential to Bulgaria’s fiscal policy. These tax incentives support businesses, stimulate economic activities, and provide assistance to specific sectors or individuals. This article offers a comprehensive overview of tax relief mechanisms available under Bulgaria’s Corporate Income Tax Act (CITA) and Personal Income Tax Act (PITA), highlighting key tax benefits for both legal entities and individuals.
To gain a broader understanding of the Bulgarian tax system, refer to our previous blog post on Taxation in Bulgaria. This provides a complete overview of the various taxes applicable to businesses and individuals in Bulgaria, including corporate income tax, personal income tax, VAT, and social security contributions.
1. Corporate Tax Relief in Bulgaria for Legal Entities (CITA)
1.1 Categories of Corporate Tax Reliefs under CITA
Corporate tax reliefs in Bulgaria are grouped into the following categories:
- Formation of Taxable Financial Results: This category encompasses tax deductions for donations, carrying forward tax losses, and accelerated depreciation.
- Social Expenses in Kind: Includes tax exemptions for specific social benefits provided to employees, such as meal vouchers and transportation allowances.
- EU-Driven Tax Incentives: These incentives align with European directives and include benefits like dividend tax exemptions for EU-resident companies.
- Corporate Tax Reassignment: This involves partial or complete tax exemptions for businesses operating in specific sectors or regions within Bulgaria.
1.2 Specific Tax Reliefs under the Bulgarian CITA
- Donations (CITA, Article 31)
Businesses operating in Bulgaria can deduct specific donation expenses, provided the recipients meet legal criteria. These eligible recipients include registered non-profit organizations, public health institutions, and educational institutions. Limits on deductible donations apply:
- Up to 10% of accounting profit for general donations.
- Up to 50% for donations to health-related activities.
- Full deduction for computer equipment donated to Bulgarian schools
- Carrying Forward Tax Losses (CITA, Articles 70-74)
Businesses in Bulgaria can carry forward tax losses for up to five years, provided they meet strict conditions. Losses incurred from foreign sources are treated differently, depending on the tax treaty method (e.g., exemption or tax credit).
- Accelerated Depreciation (CITA, Article 55)
Enterprises investing in specific assets in Bulgaria, such as innovative technologies, can benefit from accelerated depreciation schedules. This allows for faster depreciation of assets, reducing taxable income.
2. Personal Income Tax Relief in Bulgaria for Individuals (PITA)
2.1 Categories of Individual Tax Reliefs under PITA
Individual tax reliefs in Bulgaria can be classified as follows:
- Income-Based Deductions: These deductions are applied during the calculation of taxable income.
- Annual Tax Base Reductions: These allow for deductions from the annual tax base for personal contributions, dependent children, or specific life circumstances.
- Monthly Reductions: These are applied to advance tax payments for eligible taxpayers.
2.2 Notable Tax Reliefs for Individuals in Bulgaria
- Relief for People with Disabilities
Taxpayers in Bulgaria with reduced working capacity (50% or more) are entitled to deductions from their annual tax base, subject to certification.
- Relief for Donations
Individuals can deduct donations made to specific organizations or causes, including charitable and educational entities, up to a specified percentage of their taxable income.
- Relief for Young Families
Families with housing loans can deduct interest payments if specific conditions are met, such as having their primary residence registered in Bulgaria.
- Child Relief
Taxpayers can reduce their annual taxable income based on the number of dependent children, with higher deductions available for children with disabilities. This child tax benefit provides valuable financial support to families.
3. Social Tax Reliefs in Bulgaria for Businesses and Individuals
Both legal entities and individuals in Bulgaria benefit from social tax incentives. Examples include:
- Meal Vouchers: Employers can provide meal vouchers to employees up to a set monthly limit. These vouchers are exempt from taxes and social security contributions.
- Transportation Benefits: Employers can cover employee commuting costs without these benefits increasing the employees’ taxable income.
- Life Insurance Premiums: Tax exemptions are available for additional voluntary contributions made to pension plans or life insurance policies.
4. EU-Aligned Tax Incentives in Bulgaria
Bulgaria’s tax legislation incorporates various EU directives to attract investments and promote economic activity within the EU:
- Dividend Tax Exemption: Dividends paid to EU-based companies are tax-exempt under specific conditions.
- Interest and Royalties Exemptions: Certain income streams between related entities within the EU benefit from withholding tax relief.
5. Implementation and Compliance with Bulgarian Tax Relief Regulations
5.1 Conditions for Eligibility
Tax reliefs in Bulgaria are subject to strict eligibility criteria. Non-compliance with these conditions, such as failing to retain proper documentation or adhere to deadlines, may result in penalties or loss of tax benefits.
5.2 Documentation and Reporting
Taxpayers must declare all tax reliefs in their annual tax returns. Supporting documents, such as donation receipts or disability certifications, are required for validation purposes.
5.3 Risks and Audits
Improper use of tax reliefs can trigger tax audits. Compliance with all legal requirements ensures risk minimization during tax control procedures.
6. Practical Applications of Tax Relief in Bulgaria
6.1 Case Study: Corporate Donations
A company donating computer equipment worth €10,000 to a university in Bulgaria can fully deduct this expense if the equipment was manufactured within one year of the donation and meets other legal conditions.
6.2 Case Study: Individual Child Relief
A parent with two children can reduce their taxable income by 12,000 BGN, resulting in a tax relief of 1,200 BGN. This deduction significantly lowers the parent’s tax liability while providing financial support.
Conclusion
Tax relief mechanisms in Bulgaria, as outlined under CITA and PITA, provide opportunities for significant financial benefits. These tax breaks support national priorities, such as innovation, education, and social welfare. Proper understanding and application of these incentives can empower businesses and individuals to optimize their tax strategies effectively.
Need help navigating the complexities of tax relief in Bulgaria? Reach out to your accountant at Aidos for expert guidance and personalized advice. Our team can help you understand the available tax benefits and ensure you meet all the necessary requirements. Contact us today for a consultation!