Enterprises shall include (Art.1, para 2 Accountancy Act): any traders, within the meaning of the Commerce Act; any legal persons that are not traders; any budget-funded enterprises and non-corporations, trade representative offices and any foreign persons conducting business operations within the territory of Bulgaria through a permanent establishment, except in the cases where the business operations are performed by a foreign person from a Member State of the European Union or from another state being a contracting party to the Agreement on the European Economic Area, solely under the terms of free provision of services.

Are you sure you have got the full package for publishing your AFS? Do you know that except the 4^th general financial statements you should attach disclosed information to the AFS and other appendixes? In order to get full details concerning the publishing of your AFS including all needed documents and the whole legal procedure you can call to V.A.V. Consultants Ltd.

We kindly remind you that the penalties in case of not publishing the AFS starts at 2000 BGN to 3000 BGN under Art.47, para 3 of the Accountancy Act. Where a violation has been committed for a second time, the pecuniary sanction in a doubled amount shall be imposed.

Often asked question is whether an Enterprise /branch/ which has not realized business activity shall file an Application for pronouncement of acts and if it is so, what is necessary to file into the Recording Agency?

Although in some cases an Enterprise has not got any incomes or expenses, this entity has to publish it’s AFS by 30 June of the following year because there is not a special edict for such cases in the Accountancy Act. At the other hand, the Commercial Act directs all specific issues back to the Accountancy Act where there is not a regulation which allows the Enterprise to not compile AFS if it has not been executed business activity within the respective year. Concerning the sole traders there is an easier form of accountancy which scopes only Profit and loss account but there is not a legal reason by virtue of the law defining that sole trader is free of publishing of AFS. In this way the legislation aims to get pubic information for all Enterprises and not only these who does business activities.

If you still have not re-registered your Enterprise, have in mind that the deadline for this is up to 31.12.2010.

How to do this and what we recommend in case you have not re-registered your Enterprise up to the moment?

You would better to re-registered your Enterprise before 30.06.2010 because in this case you will be able to publish AFS for the last three years /2007, 2008, 2009/ with only one state tax payment

The Enterprises who finish the re-registration within the period from 01.06.2010 to 31.12.2010 should declare and file for publishing in the Commercial Register the documents under Art.40, para 1 of the Accountancy Act since 2007 to 2009 within 3 month period as at the date the date of re-registration.

General sources:

• http://www.ec.europa.eu/eurostat – the official on-line address of Eurostat
•  http://www.nsi.bg – the official on-line address of the Bulgarian National Statistics Institute
• http://www.noi.bg – the official website of the Bulgarian National Social Security  Institute
• Selected announcements from the most professional on-line journals in Bulgaria

1.    Do you know that:

• Bulgaria is the country that decreased most considerable  it’s taxation within the beginning of the 20^th century by data provided to Eurostat.
• All the Bulgarian governments for the last 15 years follow a policy upon decreasing the taxation in Bulgaria.
• By data from June 2009, Bulgaria stand 8^th to the lowest rates of taxes and social securities
• The Public Debt of Bulgaria as a percentage on the Gross Domestic Product (GDP) for 2009 has been the lowest one in EU.
• By data from Eurostat for February 2009 Bulgaria stand second to average annual inflation in EU – 0.4% per month
• Bulgaria is a young and perspective European market with many opportunities and friendly “business climate”.

2.    If you wish to establish a business in Bulgaria it is good to have idea about:

• The local taxation and the professional accounting services.
• The most important business indicators summarized in the table below:

Legal Framework
Income Taxes on Natural Persons Act /ITNPA/

The taxation under Individual Income Tax Act ranging incomes of natural persons, including income from activity in a sole-trader capacity.

The tax rates under ITNPA are at the rates below:

• 5%. - In the case of taxable income from dividends
• 7%. - In the case of incomes from supplementary voluntary social insurance, from voluntary health insurance and life assurances under the rules of the Law
• 15% - for advanced contributions of the Natural Person Merchants
• 10% - for all the other cases

Advanced tax contributing:

• For the employment relationships – every month. The employer deducts the individual taxes form the respective employment incomes and contributes them to the tax authorities
• Any person, who has acquired income from economic activity referred to in Article 29 herein, shall be liable to make a tax prepayment on the difference between the taxable income and the contributions which the self-insured person is obligated to make for the account thereof for the months of the quarter during which the taxable income was acquired, and if the person is not self-insured, on the difference between the taxable income and the compulsory social insurance contributions withheld.
• Any persons who or which carry out economic activity in a merchant capacity within the meaning given by the Commerce Act, including any sole traders, shall remit tax prepayments at the rate of 15 per cent under the terms and according to the procedure established by the Corporate Income Tax Act.
• Any person, who has acquired income from rent or from other onerous provision for use of rights or property, shall be liable to make a tax prepayment on the difference between the taxable income under Article 31 herein and the social insurance contributions which the person is obligated to make for the own account thereof.

Taxable persons under this Act shall be:

1. any resident and non-resident natural persons, who are liable to taxes under this Act;

2. any resident and non-resident persons, who are obligated to withhold and remit taxes under the ITNPA

Any income under ITNPA shall be deemed to be acquired on the date of:

1. payment: in the case of cash payment;

2. crediting the account of the recipient of the income or receipt of the cheque: in the case of non-cash payment;

3. receipt of the consideration: in the case of non-cash income.

Taxability under ITNPA shall apply to income derived from all sources acquired by a taxable person during the tax year, with the exception of the income which is non-taxable by virtue of a law.

The Taxability shall not apply to:

Art.13 (1) ITNPA

1. any income acquired during the tax year from the sale or exchange of:

(a) (amended, SG No. 95/2009, effective 1.01.2010) one residential immovable property, provided that more than three years have elapsed between the date of acquisition and the date of sale or exchange;

(b) up to two immovable properties, as well as any number of agricultural and forest properties, provided that more than five years have elapsed between the date of acquisition and the date of sale or exchange;

2. any income accruing from the sale or exchange of movable property, with the exception of:

(a) means of transport by road, air and water, provided that the period from the date of acquisition to the date of sale or exchange is less than one year;

(b) works of art, collectors’ items and antiques;

(c) shares, interests, compensation instruments, investment vouchers and other financial assets, as well as the income accruing from trade in foreign exchange;

(d) movable property delivered to persons who have the right to carry out collection, transport, recovery or disposal of waste in accordance with the Waste Management Act;

3. (amended, SG No. 106/2008, effective 1.01.2009) any income accruing from disposition of financial instruments within the meaning given by Item 11 of § 1 of the Supplementary Provisions herein;

4. any profit or another source of owners’ equity distributed in the form of new interests and shares in commercial corporations, as well as any profit or another source of owners’ equity distributed in the form of an increase of the nominal value of the previously issued interests and shares;

5. any income accruing to persons indemnified according to the procedure of a statutory instrument from the sale or exchange of compensation instruments and investment vouchers received as indemnity;

6. any income accruing from compulsory social insurance in Bulgaria or abroad;

7. any income accruing from supplementary voluntary social insurance received after attainment of entitlement to supplementary pension; any income accruing from investment of the technical provisions received under contracts of insurance; and income accruing from investments of the assets of the supplementary retirement insurance funds, apportioned to the individual accounts of the insured persons;

8. (amended, SG No. 106/2008, effective 1.01.2009) any interest paid on accounts and deposits with any commercial bank and branch of a foreign bank established in a Member State of the European Union, or in another State which is a Contracting Party to the Agreement on the European Economic Area;

9. (amended, SG No. 32/2009, effective 1.01.2010) any interest paid and discounts made on Bulgarian government, municipal and corporate bonds; as well as on similar bonds issued according to the legislation of another Member State of the European Union or of a State which is a Contracting Party to the Agreement on the European Economic Area;

10. any interest on claims established by a court of law, which are not subject to taxation, and any indemnities awarded for court costs;

11. any compensations and other such payments awarded for medium and grievous bodily harm, occupational disease or death;

12. any compensations for property taken by eminent domain for state and municipal needs;

13. any compensations for damage to property and personal injury, with the exception of the compensations for lost profit;

14. any insurance benefits, when an insured event has incurred;

15. any social assistance allowances and benefits received in pursuance of the Integration of Persons with Disabilities Act, the Child Protection Act, the Family Allowances Act or of another statutory instrument, as well as any unemployment benefits and allowances received in pursuance of a statutory instrument;

16. any assistance from organizations with social activity, established by a law, and from not-for-profit legal entities registered for pursuit of public benefit activities;

17. any amounts received in pursuance of the Family Allowances Act, as well as any alimony and child support payments received by entities according to the provisions of the Family Code;

18. any scholarships in favour of natural persons for the study thereof in Bulgaria and abroad;

19. any sums of money and merchandise awards received in pursuance of a statutory instrument by donors of blood, blood components and biological products for human purposes;

20. any winnings and merchandise awards received through participation in games of chance within the meaning given by the Gambling Act;

21. (amended, SG No. 113/2007) any winnings and merchandise awards received through participation in games other than those referred to in Item 20, or in other games in which the winnings are determined by chance;

22. any government and national awards granted to creative artists in the field of culture and to athletes, as well as any prizes of laureates of competitions under projects and programmes financed in whole or in part by the Culture National Fund;

23. (amended, SG No. 106/2008, effective 1.01.2009) any sums received for travel and accommodation expenses under legal relationships other than employment relationships, where for the account of the commissioning entity and where documented according to the procedure established by effective legislation, as well as the per diem expenses, but not more than their double amount fixed for persons under employment relationships;

24. any income derived from ground rent, rent charge or from other onerous provision for use of agricultural land;

25. any remunerations drawn by: the members of the staff of diplomatic missions in accordance with the Vienna Convention on Diplomatic Relations; the members of consulates in accordance with the Vienna Convention on Consular Relations; the employees of inter-state and inter-governmental organizations according to the international treaty concluded with the respective organization, and the members of the family of any such persons, insofar as this is provided for in the relevant international treaty;

26. any income accruing from the sale or exchange of any property acquired by legal or testamentary succession, as well as of any property restituted according to the procedure established by a statutory instrument;

27. any consumer dividends distributed by cooperatives established under the Cooperatives Act.

(2) (Amended, SG No. 95/2009, effective 1.01.2010) Any property devolved by legal or testamentary succession or acquired by donation, as well as any property received with a restored right of ownership according to the procedure established by a statutory instrument, shall not be treated as income.

(3) (Repealed, SG No. 95/2009, effective 1.01.2010).

(4) (New, SG No. 95/2009, effective 1.01.2010) No tax shall be assessed at the date of acquisition of any shares and interests allotted in consideration of non-cash contributions made to commercial corporations.

(5) (Renumbered from Paragraph (4), amended, SG No. 95/2009, effective 1.01.2010) The provisions of Paragraphs (1), (2) and (4) shall not apply to any income accruing from economic activity in a merchant capacity within the meaning given by the Commerce Act, including in a sole-trader capacity.

Taxation of Income

Any non-resident natural person shall be liable to taxes in respect of any income acquired thereby from sources inside the Republic of Bulgaria under the meaning of the Law.

Types of Income under ITNPA:

1. Incomes from employment relationships;

2. Incomes from economic activity in a sole-trader capacity;

3. Incomes from other economic activity;

4. Incomes from rent or from other onerous provision for use of rights or property;

5. Incomes from transfer of rights or property;

6. Incomes from sources referred to in Article 35 of ITNPA taxable with final taxes.

The incomes may be cash and non-cash
There are different tax reliefs in conditions ruled by the Law

The taxable amount that is basis of taxation excludes some incomes, dependent on the diferen statuses of the taxable persons and the respective taxable incomes.  For example, the contributions for individual social securities, labour compensations, fringe benefites, travel expenses of business trips etc. if the legal requirenments regarding their values and rules of using are accomplished.

Taxation of Non-resident Persons’ Income

Article 37. (1) (Supplemented, SG No. 113/2007) A final tax, notwithstanding the circumstances covered under Article 13 herein, shall be levied on the following income from a source inside Bulgaria, charged/paid in favour of any non-resident natural person, where not realized through a fixed base within the country:

1. any compensations for lost profit and damages of such nature;

2. any scholarships for study in Bulgaria and abroad;

3. any interest payments, including interest within payments under a lease contract;

4. any income from rent or from other onerous provision for use of movable or immovable property, including any payments under a lease contract which does not expressly provide for transfer of the right of ownership to the property;

5. any payments received under franchising agreements and factoring contracts;

6. any copyright and licence royalties;

7. any technical assistance fees;

8. (amended, SG No. 113/2007) any remunerations for activity performed within the territory of the country by non-resident natural persons who are public figures, or such active in science, art, culture and sports, including where the income has been paid/charged through a third party, such as a performer-management agency, a production company and other intermediaries;

9. any income from management and control, from participation in management and supervisory bodies of enterprises;

10. any income from sale, exchange or other onerous transfer of immovable property;

11. (supplemented, SG No. 113/2007) any payments under a lease contract which expressly provides for transfer of the right of ownership to immovable property;

12. any income from sale, exchange or other onerous transfer of shares, interests, compensation instruments, investment vouchers and other financial assets, with the exception of the income from exchange covered under Article 38 (5) herein.

(2) (Amended, SG No. 113/2007) The final tax on the income covered under Items 1 to 9 of Paragraph (1) shall be assessed on the gross sum total of the incomes charged/paid.

(3) (New, SG No. 113/2007) The final tax on the income covered under Items 10 and 11 of Paragraph (1) shall be assessed on the positive difference between the selling price and the documented cost of acquisition of the property debited with 10 per cent expenses.

(4) (New, SG No. 113/2007) The final tax on the income covered under Item 12 of Paragraph (1) shall be assessed on the positive difference between the selling price and the documented cost of acquisition of the property.

(5) (New, SG No. 113/2007) Where part of the selling price has been paid, the part of the selling price received and the part of the documented cost of acquisition corresponding to the said part shall be presumed as a selling price and a documented cost of acquisition of the property upon assessment of the final tax under Paragraphs (3) and (4).

(6) (New, SG No. 113/2007) Upon termination of a lease contract, which expressly provides for transfer of the right of ownership prior to the expiry of the term of validity of the contract and without transfer of the right of ownership to the movable or immovable property subject to the contract, the non-refundable lease payments shall be treated as income from use of property accruing to the non-resident person at the time of termination. The final tax under Items 3 and 11 of Paragraph (1), remitted until the time of termination of the lease contract, shall be deducted from the final tax due under Item 4 of Paragraph (1).

(7) (Renumbered from Paragraph (3), SG No. 113/2007, amended, SG No. 106/2008, effective 1.01.2009) No final tax shall be levied on any income under Paragraph 1, exempted from taxation under Article 13 herein and charged/paid in favour of non-resident natural persons established for tax purposes in a Member State of the European Union or in another Member State of the European Economic Area.

(8) (Renumbered from Paragraph (4), SG No. 113/2007, amended, SG No. 106/2008, effective 1.01.2009) The circumstances referred to in Paragraph (7) shall be certified to the payer of the income by a document issued by the tax administration of the State in which the person is established for tax purposes, and by a declaration by the person who has acquired the income, to the effect that the circumstances covered under Article 13 exist.

Recalculation of Final Tax under Article 37

Article 37a. (New, SG No. 95/2009, effective 1.01.2010) (1) Any non-resident natural person, who is a resident person for tax purposes of a Member State of the European Union or of another State which is a Contracting Party to the Agreement on the European Economic Area, shall have the right to opt for a recalculation of the final tax on income under Article 37 herein. Where the non-resident person opts for a recalculation of the final tax, the said recalculation shall be made in respect of all incomes acquired by the person during the year which are subject to levy of a final tax under Article 37 herein.

(2) Where the non-resident person opts for a recalculation of the final tax on the incomes under Article 37 herein, the tax as recalculated shall be equal to the tax on the aggregate annual taxable amount or to the tax on the annual taxable amount under Article 28 herein which would have been due on such incomes in case the said incomes were acquired by a resident natural person. Where the non-resident person has effected any expenses associated with the incomes referred to in sentence one, whereon a tax on expenses would have been due according to the procedure established by the Corporate Income Tax Act, in case the said expenses have been effected by a resident natural person, the said tax shall be added to the sum total of the tax as recalculated.

(3) Where the amount of the final tax on income under Article 37 herein as remitted exceeds the amount of the tax as recalculated under Paragraph (2) for the same incomes, the difference shall be refundable up to the amount of the final tax under Article 37 herein which the non-resident person cannot deduct from the tax due on the said incomes in the State where the said person is resident for tax purposes.

(4) The option of recalculation of the final tax under Article 37 herein shall be exercised by means of submission of the annual tax return under Article 50 herein. All other incomes subject to declaring by the non-resident natural person shall also be included in the tax return.

(5) The refund of tax under Paragraph (3) shall follow the procedure established by the Tax and Social-Insurance Procedure Code.

(6) Paragraphs (1) to (5) shall not apply in the cases where the non-resident person is resident for tax purposes of any State which is a Contracting Party to the Agreement on the European Economic Area but which is not a Member State of the European Union, wherewith the Republic of Bulgaria:

1. does not have an effective convention for the avoidance of double taxation, or

2. has an effective convention for the avoidance of double taxation which does not provide for:

(a) exchange of information, or

(b) cooperation in tax collection.

Income of Resident and Non-resident Natural Persons

Article 38. (1) A final tax shall be levied on the taxable income from dividends and from shares in any liquidation surplus in favour of:

1. any resident or non-resident natural person, where accruing thereto from a source inside Bulgaria;

2. any resident natural person, where accruing thereto from a source outside Bulgaria.

(2) The final tax on any income from dividends shall be assessed on the gross amount as determined by the decision on the distribution of dividend.

(3) The final tax on any income from dividends in the form of a hidden profit distribution shall be assessed on the gross amount of the expenses as charged.

(4) The final tax on share in any income from liquidation surplus shall be assessed on the positive difference between the value of the said share and the documented cost of acquisition of the participating interest in the company/cooperative.

(5) (Amended, SG No. 113/2007) A final tax shall be levied on any taxable income acquired from exchange of shares and interests in connection with transformation of corporations under Section II of Chapter Nineteen of the Corporate Income Tax Act:

1. by resident natural persons upon the exchange of shares and interests in domestic commercial corporations for shares and interests in domestic commercial corporations or in commercial corporations abroad;

2. by resident natural persons upon the exchange of shares and interests in commercial corporations abroad for shares and interests in commercial corporations abroad or in domestic commercial corporations;

3. by non-resident natural persons upon the exchange of shares and interests in domestic commercial corporations for shares and interests in domestic commercial corporations or in commercial corporations abroad.

(6) The taxable income referred to in Paragraph (5) shall be determined at the time of the exchange and shall be the positive difference between the market price of the shares/interests acquired upon the exchange and the cost of acquisition under Article 33 (6) herein of the shares or interests in the transforming corporation.

(7) The market price referred to in Paragraph (6) shall be presumed to be a cost of acquisition under Article 33 (6) upon a subsequent sale or exchange of the shares and interests in the acquiring/newly established corporation, as well as upon a subsequent application of Paragraph (6).

(8) A final tax shall be levied on the gross sum total of the taxable income from supplementary voluntary social insurance, from voluntary health insurance and life assurances, acquired at the date of:

1. recovery of the amounts remitted for life assurances;

2. recovery of the amounts remitted for voluntary health insurance, with the exception of the cases of refund of expenses on health services and provision of health services and goods to the insured person upon occurrence of the events provided for in the contracts of health insurance;

3. receipt of the amounts remitted for supplementary voluntary social insurance prior to attainment of entitlement to supplementary pension;

4. transfer of amounts from an individual account to the account of a third party;

5. modification of the contract of insurance, in respect of which a relief under Article 19 herein has been enjoyed, into a contract for which the said relief may not be enjoyed;

6. drawing on the amounts under a contract for assurance for repayment of a loan, where a life assurance is used to secure an obligation of the natural person.

(9) No final tax shall be levied on any income referred to in Paragraph (8), corresponding to the portion of the payments/premiums for which a tax relief has not been enjoyed according to the procedure established by Article 19 herein.

(10) A final tax shall be levied on the gross amount of the income acquired by the person upon the sale or exchange of movable property under Item 2 (d) of Article 13 (1) herein.

Income of Resident and Non-resident Natural Persons

Article 38. (1) A final tax shall be levied on the taxable income from dividends and from shares in any liquidation surplus in favour of:

1. any resident or non-resident natural person, where accruing thereto from a source inside Bulgaria;

2. any resident natural person, where accruing thereto from a source outside Bulgaria.

(2) The final tax on any income from dividends shall be assessed on the gross amount as determined by the decision on the distribution of dividend.

(3) The final tax on any income from dividends in the form of a hidden profit distribution shall be assessed on the gross amount of the expenses as charged.

(4) The final tax on share in any income from liquidation surplus shall be assessed on the positive difference between the value of the said share and the documented cost of acquisition of the participating interest in the company/cooperative.

(5) (Amended, SG No. 113/2007) A final tax shall be levied on any taxable income acquired from exchange of shares and interests in connection with transformation of corporations under Section II of Chapter Nineteen of the Corporate Income Tax Act:

1. by resident natural persons upon the exchange of shares and interests in domestic commercial corporations for shares and interests in domestic commercial corporations or in commercial corporations abroad;

2. by resident natural persons upon the exchange of shares and interests in commercial corporations abroad for shares and interests in commercial corporations abroad or in domestic commercial corporations;

3. by non-resident natural persons upon the exchange of shares and interests in domestic commercial corporations for shares and interests in domestic commercial corporations or in commercial corporations abroad.

(6) The taxable income referred to in Paragraph (5) shall be determined at the time of the exchange and shall be the positive difference between the market price of the shares/interests acquired upon the exchange and the cost of acquisition under Article 33 (6) herein of the shares or interests in the transforming corporation.

(7) The market price referred to in Paragraph (6) shall be presumed to be a cost of acquisition under Article 33 (6) upon a subsequent sale or exchange of the shares and interests in the acquiring/newly established corporation, as well as upon a subsequent application of Paragraph (6).

(8) A final tax shall be levied on the gross sum total of the taxable income from supplementary voluntary social insurance, from voluntary health insurance and life assurances, acquired at the date of:

1. recovery of the amounts remitted for life assurances;

2. recovery of the amounts remitted for voluntary health insurance, with the exception of the cases of refund of expenses on health services and provision of health services and goods to the insured person upon occurrence of the events provided for in the contracts of health insurance;

3. receipt of the amounts remitted for supplementary voluntary social insurance prior to attainment of entitlement to supplementary pension;

4. transfer of amounts from an individual account to the account of a third party;

5. modification of the contract of insurance, in respect of which a relief under Article 19 herein has been enjoyed, into a contract for which the said relief may not be enjoyed;

6. drawing on the amounts under a contract for assurance for repayment of a loan, where a life assurance is used to secure an obligation of the natural person.

(9) No final tax shall be levied on any income referred to in Paragraph (8), corresponding to the portion of the payments/premiums for which a tax relief has not been enjoyed according to the procedure established by Article 19 herein.

(10) A final tax shall be levied on the gross amount of the income acquired by the person upon the sale or exchange of movable property under Item 2 (d) of Article 13 (1) herein.

Taxable with royalty shall be companies with annual turnover for the previous year less than 50 000 BGN and have not a registration upon VAT Act. The persons who provide taxable activities have to introduce a declaration to municipality until 30 January of the current year.

The license tax shall be remitted in four equal payments, as follows:

1. for the first quarter: on or before the 31st day of January;

2. for the second quarter: on or before the 30 th day of April;

3. for the third quarter: on or before the 31st day of July;

4. for the fourth quarter: on or before the 31st day of October.

The full list of all the license activities is pointed in Appendix 4 of the Local Taxes and Fees Act and is summarized below:

Unless otherwise provided for by law, annual financial statements of the following shall be subject to an independent financial audit by registered auditors:

1. joint stock companies and partnerships limited by shares;

2. enterprises which are issuers in the meaning of the Public Offering of Securities Act ;

3. credit institutions, insurance and investment undertakings, companies for additional social security and the funds managed by them;

4. enterprises for which this requirement is established by a law;

5. all enterprises not mentioned in items (1) through (4), with the exception of enterprises applying a simplified form of financial reporting and budget-funded enterprises.

Annual financial statements of non-profit legal persons designated as operating for the public benefit and listed in the Central Register with the Ministry of Justice shall be subject to an independent financial audit by registered auditors where for the current year they exceed one of the following criteria:

1. balance sheet assets as of 31 December: BGN 1 million;

2. income from for-profit and not-for-profit operations for the current year: BGN 2 million;

3. total amount of financing received during the current year and financing received in previous reporting periods not absorbed as of 31 December: BGN 1 million.

Consolidated financial statements and individual financial statements included in the consolidation shall be subject to independent financial audit.

In the joint-stock companies, the functions of an audit committee shall be performed by the management board or the board of directors or the supervisory board if based on the last annual report the entity meets at least two of the following criteria:

1. average headcount for the year – up to 50 members of staff;

2. book value of its assets at 31 December of up to BGN 18,000,000;

3. net income from sales for the year – up to BGN 20,000,000.

The meetings of the body performing the functions of an audit committee shall be chaired by a chairman other than an executive director and who is elected by the supervisory board under a two-tier management system or by the general meeting of shareholders under one-tier management system.

The audit committee shall perform the following functions:

1. monitor the financial reporting processes in the public-interest entity;

2. monitor the effectiveness of the company’s internal control systems;

3. monitor the effectiveness of the company’s risk management systems;

4. monitor independent financial audit in the company;

5. review the independence of the registered auditor of the company in accordance with the requirements of law and the Code of Ethics of professional accountants, including monitoring the provision of additional services by the registered auditor to the audited entity.

Registered auditors shall report to the audit committee on key matters arising from the audit, paying attention to material weaknesses in the company’s internal control systems in relation to the financial reporting process.

The appointment of a registered auditor to carry out independent financial audit of public-interest entity shall be based on a recommendation by the audit committee.

The audit committee shall report its activity to the general meeting or the single owner of the capital of the public-interest entity once a year together with the adoption of the annual financial statements.

To Quick Guide 2010

The customary method of depreciation in Bulgaria for tax purposes is the straight line method. An asset that costs less than BGN500 is not defined as a fixed asset. When calculating the taxable profit, depreciation allowances shall be determined, in compliance with the tax recognized depreciation quota.

For tax purposes the assets subject to depreciation shall be grouped into the following categories. The annual depreciation rates are set in accordance with the provisions of Corporate Income Tax Act: Depreciation rates for tax purposes are determined only once annually and cannot exceed the following rates for 2005:

In accordance with the Bulgarian Legislation two Depreciation plans should be prepared:

1. Accounting Depreciation Plan It includes assets which amount is determined by the management of the company. Accounting depreciation rates are set in accordance with the depreciation policy, accepted by the management of a company.

2. Tax Depreciation Plan  It should be drawn up in accordance with The Corporate Income Tax Act. It includes all business assets at the amount above 500BGN. The depreciation rates are set by the Corporate Income Tax Act for each category of assets.

3. At the end of the Fiscal Year the accountings profit/lost is increased by the accrued accounting depreciation and decreased by the accrued tax depreciation. 

AMENDMENTS TO THE VALUE ADDED TAX SYSTEM

The rules of Directive 2006/112/EC upon the common VAT System caused the amendments in the National Bulgarian VAT legislation. The basic amendments concerns the place of supply of services and the VAT refund to persons established in other EU Member States. We present below the most important of these changes, and namely:

• New order regarding the place of supply of services

• Amendments of the new VAT registration obligation

• Reducing of the time limits for VAT refund

• Reducing the range of invoice requisites

• Obligation to Declare an E-mail Address

• New order of VAT Refund procedure

New order regarding the place of supply of services

The place of supply of services is very important for classifying a deal as taxable or non-taxable one. As of 01.01.2010 the common rule for defining the place of supply of services is relevant to the tax status of the recipient and the character of the service itself. Depending on whether the recipient is a taxable or non-taxable person, the place of supply would be:

• The place where the supplier is established and executes its independent economic activity in case the recipient is non-taxable person. If the service is provided to a permanent object in a place other than the place where the recipient is established, the place of supply would be the place where that permanent object is situated. According this general rule there are a few exceptions that are mainly relevant to the receiving of so called intellectual services received by non-taxable person that is established outside the EU (e.g. transfers of copyrights, advertising services, services of consultants, lawyers and accountants, supply of staff etc). In these cases the place of supply would be the place where the recipient is established.

• The place where the recipient is established in case that services are supplied to taxable persons. If the service is provided to a permanent object in a place other than the place where the recipient is established, the place of supply would be the place where that permanent object is situated.

The table below compares some general cases of services when the place of supply is changed because of the new VAT legislation:

Type of services Until 31.12.2009 As of 01.01.2010

General rule on place of supply of services The place where the supplier is established The place where the recipient is established

Short-term hiring of means of transport (not exceeding 30 days) The place where the supplier is established regardless of the term of the hiring The place where the means of transport is actually put at the disposal of the customer

Long-term hiring of means of transport (exceeding 30 days) The place where the supplier is established regardless of the term of the hiring The place where the recipient is established

Valuation and work on movable tangible property * The place where the real estate is situated The place where the real estate is situated

Services concerning cultural, artistic, sporting, scientific, educational, entertainment and similar services ** The place where the service is physically carried out The place where the service is physically carried out

Transport of goods outside EU The place where the transport takes place, proportionate to the distances covered The place where the recipient is established

Intra-Community transport of goods The place of departure of the goods The place where the recipient is established

Ancillary transport activities (loading, unloading, handling and similar activities) The place where the service is physically carried out The place where the recipient is established

Services by intermediaries The place where the underlying transaction is supplied The place where the recipient is established

_____

* The place of supply of services relevant to real estates is without significance about the tax status of the recipient and the rules of its defining as to 01.01.2010 are the same as these rules until 31.12.2009

** The place of supply of services concerning cultural, artistic, sporting, scientific, educational, entertainment and similar services is also not significant about the tax status of the recipient and the legal rules are the same than 2009.

The amendments in the order for defining the place of supply of services provoke changes in the person whom the tax is chargeable from in case that:

- The supply is taxable

-  The place of supply is in Bulgaria

-  The supplier is situated out of Bulgaria

In the common occasion, if all of these conditions are simultaneously available, the tax is chargeable from the recipient of the service.

New VAT Registration Obligations

• Concerning taxable persons who receive services with a place of supply in Bulgaria and who are liable to account for the VAT under the reverse-charge mechanism appeared a new obligation to register for VAT purposes regardless of their turnover.

• A new order is legalized about the foreign persons who are established for VAT purposes in another EU Member State or in a third country which Bulgaria has mutual assistance arrangements with. These persons have no more obligation of register for VAT purposes via a VAT agent and could register under the common rules. The using of a VAT agent is only optional for these persons.

• The taxable persons who supply services with a place of supply in another EU Member State and are established for VAT purposes in Bulgaria are also liable to VAT registration.

Shorter Time Limits for VAT Refund

• The term of using the right to deduct VAT is increased up to 12 months. There is an opportunity to deduct VAT in this term when this right is not executed until 01.01.2010.

• The term of the subject to refund VAT is already shorted in 2 months and the two-month carry-forward is applicable for VAT which became subject to refund in a tax period following 1.01.2010. The rest of VAT for refund which is not deducted should be refund within 30-days from the date of filing of the last VAT Declaration.

• Persons who has carried out during the last 12 months before the current month zero – rated taxable supplies which are more than 30% of all taxable supplies that have been made the VAT is subject to immediate refund within 30 days following the submission of the VAT return and is not subject to carry-forward, as previously.

• When there is a subject to refund VAT and the tax authorities do not refund it unreasonable or refund the amount of VAT not in time in these cases the VAT should be refunded together with the statutory interest, calculated from the date when the tax should have been refunded until the final refund. This should be done regardless of the fact that in case of a tax audit the time limits for VAT refund are relevant to the deadline for the tax assessment act issue.

Reduce the range of the invoice requisites

The name of person who compiles the invoice is no longer necessary to be pointed in the invoices.

Declaring of an e-mail Address

As to 01.01.2010 a new obligation is introduced concerning to declare an e-mail address for correspondence with the National Revenue Agency if such has not been declared before the Registry Agency. The deadline of executing this is 01.04.2010. In the opposite as a consequence, the tax authorities may terminate the VAT registration of the person.

Amendments in refunding VAT procedure concerning persons established in another EU Member State

The rules of refunding of VAT to persons who are established in another EU Member State are changed under the provisions of the new Regulations No N-9 of 16.12.2009 issued by Ministry of Finance that would be applied after 01.01.2010. Under this regulations it is not necessary to use a VAT agent for refunding VAT. The other general amendments are pointed below:

• Presentation of a Claim for refunding VAT as an electronic application. On this account the Claim would be present via the electronic portal of the Member State in which the applicant is established in Bulgarian or in English language. The Claim is submitted up to 30 September of the following year. If the refund concerns a period of 3 months VAT for refund may not be less than 800 BGN. In case the refund is relevant to a period of 1 calendar year, VAT for refund may not be less than 100 BGN.

• It is not necessary to enclose copies of invoices with the Claim of refunding

• Receiving a Notification of the Member State of refund decision about approving or refusing the application. It have to be carried out within 4 months of its receipt. The VAT should be paid in term of 10 working days of the expiry of the 4-month deadline

To represent the annual rates of depreciation corresponding the different asset categories we summarized a table and fragment of the Corporate Income Tax Act. (amended and supplemented, SG No. 95/1.12.2009, effective 1.01.2010) wherein the rules of defining the depreciations are very unconditionally pointed.

Article 55. (1) Upon determination of the annual tax depreciations, tax depreciable assets shall be allocated to the following categories:

1. Category I: solid buildings, including investment properties, plant, transmission facilities, electric power carriers, communication lines;

2. Category II: machinery, process equipment, apparatus;

3. Category III: means of transport excluding automobiles; surfacing of roads and of runways;

4. (Supplemented, SG No. 110/2007) Category IV: computers, computer peripheral equipment, software, and right to use software, mobile telephones;

5. Category V: automobiles;

6. Category VI: tax tangible and intangible fixed assets whereof the period of use is restricted according to contractual relationships or a legal obligation;

7. Category VII: all other depreciable assets.

(2) The annual rate of tax depreciation shall be determined on a single occasion for the year and may not exceed the following amounts:

(3) In respect of Category II assets, the annual rate of tax depreciation may not exceed 50 per cent, where the following conditions are simultaneously fulfilled:

1. the assets form part of an initial investment;

2. the assets are new as fabricated and have not been exploited prior to the acquisition thereof.

(4) (Repealed, SG No. 110/2007).

(5) (New, SG No. 110/2007) The acquisition of an asset through conclusion of a lease contract, classified as financial lease according to accounting legislation, shall be no grounds for allocation of the said asset to Category VI.

(6) (New, SG No. 106/2008, effective 1.01.2009) Item 1 of Paragraph (3) shall not apply where the assets covered under Paragraph (3) have been acquired in connection with an investment made in improvement of energy efficiency where voluntary agreements have been concluded according to the procedure established by Section II of Chapter Five of the Energy Efficiency Act.

Standard Procedure for Posting of Assets in Tax Depreciation Schedule

Tax Depreciable Assets

Article 48. Tax depreciable assets shall comprehend:

1. the tax tangible fixed assets;

2. the tax intangible fixed assets;

3. the investment properties, with the exception of land;

4. the subsequent expenses referred to in Article 64 herein.

Goodwill

Article 49. (1) Goodwill generated as a result of a business combination shall not be a tax depreciable asset.

(2) Any loss from impairment and upon write-off of goodwill shall not be recognized for tax purposes.

Tax Tangible Fixed Assets

Article 50. “Tax tangible fixed assets” shall be the amounts which satisfy the requirements for depreciable tangible fixed assets according to the National Financial Reporting Standards for Small and Medium-Sized Enterprises whose value equals or exceeds the lesser of:

1. the value materiality threshold for the tangible fixed asset, as adopted in the accounting policies of the taxable person;

2. (amended, SG No. 110/2007) seven hundred leva.

Tax Intangible Fixed Assets

Article 51. (1) “Tax intangible fixed assets” shall be:

1. any acquired non-financial resources which:

(a) have no physical substance;

(b) are used during a period longer than twelve months;

(c) have a limited useful life;

(d) are of a value which equals or exceeds the lesser of:

(aa) the value materiality thresholds for the tangible fixed asset, as adopted in the accounting policies of the taxable person;

(bb) (amended, SG No. 110/2007) seven hundred leva;

2. (repealed, SG No. 110/2007);

3. any amounts charged as a result of business transactions leading to an increase in the economic benefits flowing from a tax tangible fixed asset which is hired or provided for use; the said amounts shall not form a tax tangible fixed asset.

(2) Any accounting expenses, accounted for in connection with the acquisition of a tax tangible fixed asset before the origination of the said asset, shall not be recognized for tax purposes in the year of accounting for the said expenses and shall be involved upon determination of the tax depreciable value of the said asset. Where any circumstances determining that the taxable person will not acquire the tax intangible fixed asset occur in a succeeding year, the unrecognized expenses referred to in sentence one shall be recognized for tax purposes in the year of occurrence of any such circumstances, if the requirements of this Act are complied with.

Tax Depreciation Schedule

Article 52. (1) Any taxable persons which form a tax financial result shall prepare and keep a tax depreciation schedule, posting therein all tax depreciable assets.

(2) The tax depreciation schedule shall be a tax ledger wherein the information, specified according to the requirements of this Act, regarding the process of acquisition, subsequent keeping, depreciation and write-off of the tax depreciable assets, shall be posted.

(3) The tax depreciation schedule shall contain, as a minimum, the following information on each tax depreciable asset:

1. designation;

2. month of commissioning;

3. tax depreciable value;

4. tax depreciation charged;

5. tax value;

6. annual rate of tax depreciation;

7. annual tax depreciation;

8. month of occurrence of any changes in the values of the asset and the circumstances necessitating the said changes;

9. month of discontinuance and resumption of the charging of tax depreciations and the circumstances which necessitate the said discontinuance and resumption;

10. month of write-off of the asset covered under Article 60 (3) herein for accounting purposes and the circumstances which necessitate the said write-off.

11. month of write-off of the asset in the tax depreciation schedule.

Values of Tax Depreciable Assets

Article 53. (1) The “tax depreciable value” shall be the historical cost of the asset debited with the charged provisions and donations associated with the asset which are included in the said cost. In the cases referred to in Article 64 (1) and Article 67 herein, the tax depreciable value shall be the sum total of:

1. the subsequent expenses: in the cases referred to in Article 64 (1) herein;

2. the expenses unrecognized for tax purposes: in the cases referred to in Article 67 herein.

(2) The “annual tax depreciation” shall be the depreciation charged in the tax depreciation schedule for the relevant year according to the requirements of this Chapter.

(3) The “tax depreciation charged” shall be the sum total of the annual tax depreciations for the relevant asset. The tax depreciation charged may not exceed the tax depreciable value of the asset.

(4) The “tax value” shall be the tax depreciable value of the asset debited with the tax depreciation charged for the said asset.

Tax and Accounting Depreciations

Legal Frame: Tax and Social Insurance Procedure Code (SIPC); State Archive Fund Act
Accounting information shall be kept at the enterprise following the procedure prescribed in the following durations:

Under Art.38 (2) Tax and Social Insurance Procedure Code, after expiry of the period for storage thereof, the data mediums covered under Paragraph 1 (summarized in the table above), whether paper-based or machine-readable, may be destroyed, unless subject to submission to the National Archival Fund.

Any auditees or examined persons shall be obligated to afford the revenue authorities access to their automated information systems, software or archives, where information under Article 38 of SIPC herein is so collected, stored and processed.

The general amendments in the Personal Income Tax Act (PITA) in force as of 1 January 2010 range the following common directions:

- Augmenting the circle of the employment relations

- Declaring the granted and the received loans

- Tax relief for young families

- Re-calculation of Withholding Tax Due by Foreign Tax Residents

- Non-Taxable Incomes

Augmenting the circle of the employment relations

The employment relations have been broadened to these relations between a legal entity and a person who work for this entity as following:

1.Shareholders, that hold more than 5% of the share capital of a Joint Stock Company

2.Shareholders in Limited Liability Companies

3.Members of cooperatives

The subject of this amendment is relevant to the terminating of the former possibility of reducing the tax basis of the personal income tax with so called statutory expenses at the rate of 25%.

About the accounted but not paid incomes in result of performed work up to 31.12.2009 the advance tax due on income will be accrued and shall be calculated according to the rules for deduction of tax on employment income.

The shareholders are not exempted of obligation to submit an annual tax return even in case that the person had not received other incomes during the year.

Declaring the granted and the received loans

Natural persons who have granted and received loans are obliged to declare in their annual tax returns information about these loans in a few cases

1. Obligations to declare the granted loans

- The unpaid portion of the granted during the tax year loans if the total amount exceeds 10 000 BGN

-The unpaid by the end of the tax year portion of the granted during this period loans or these which were granted the previous 5 tax years if the total unpaid amount exceeds 40 000 BGN

2.Obligation to declare the received loans

- The unpaid portion of the received during the tax year loans if the total amount exceeds 10 000 BGN, except for loans received by credit institutions in the meaning of the Credit Institution Act

- The unpaid by the end of the year portion of the received during this period loans or these which were received the previous 5 tax years if the total unpaid amount exceeds 40 000 BGN, except for loans received by credit institutions in the meaning of the Credit Institution Act.

 Up to 30 April 2010, the natural persons have to declare the granted and the received loans in their annual tax return for 2009. If there is non-execution of this due the consequences are considerable – the undeclared loan or part of it is a subject to administrative sanctions at the rate of 10% of the respective amount of this undeclared loan.

Tax relief for young families

The conditions of using the tax relief for young families concerning their incomes are specified in general as following:

1. The loan must be on mortgage
2. The loan should be used for the purchase of an abode
3. Only one of spouses can use the tax relief
4. All the documents, pointed below have to be applied to the annual tax return, and namely:

- Loan certificate by the bank granted the loan that certify the amounts of all payments about the interest during the tax year concerning the first 100 000 BGN upon the principal and the type of the loan.

- Copy of a marriage license

-Statement of the property status

- Loan contract – for mortgage loan

- Redemption plan

- Documents certifying the paid installments

Re-calculation of withholding tax due by foreign tax residents

The foreign tax residents who are tax residents of an EU or EEA will have an opportunity to recalculate their withholding tax that have been deducted by Bulgarian payers concerning incomes which are taxable with withholding tax. There is a binding force of executing this re-calculation that rules the existing of a Double taxation treaty between the state of the foreign resident and Bulgaria. The executing of this procedure is relevant to the opportunity for the foreign tax resident weather to choice re-calculation of withholding tax or not. If the foreign resident prefers this option the re-calculated withholding tax is equal to the tax upon the annual tax basis which would be taxable regarding these incomes in case the same incomes have been realized by a local natural person. The foreign tax resident would be entitled to deduct its expenses incurred in connection with the income derived from Bulgarian source. About this reason the taxation of such incomes as of 2010 will be implement on a net basis.

Non-Taxable Incomes

Concerning the incomes derived from transactions with only one real estate have been introduced conditions for defining such incomes like non-taxable, and namely: 1.The estate transaction realized by the foreign person would be no more than one within the tax year and 2.The period of time between the date of acquiring and the date of the sale or exchange of the residential estate must be over than 3 years.

Regarding the calculation of the taxable income from sale or exchange of shares received against a contribution in kind in companies the taxable person will deduct the contribution in kind described in the Constituent act of the company in compliance with the sold or exchanged shares. This deduction may be applied only in case the object of contribution in kind is a real estate the income from the sale or exchange of which is not taxable as per the date of registration of the contribution in kind with the Commercial Register. In the opposite from the selling price must be decreased the documented price of acquisition of the real estate.