I. Nature of a Gift Contract

A gift is a contract by which the donor immediately and gratuitously transfers an item to the recipient, and the recipient accepts it. The subject of a gift can be any item, except for those prohibited from being gifted or those considered "extra comercio" (for private use). A gift can include claims, securities, a collection of rights, movable and immovable property, and funds. The gift contract is regulated in the Bulgarian Law on Obligations and Contracts (LOC) in Article 225–227. In this contract:

• the donor immediately transfers an asset right to the recipient;
• the recipient accepts it;
• the contract is presumed to be gratuitous (without consideration for the transferred item);
• A gift is considered void if it or the reason for it violates the law or public policy, or if the conditions or encumbrances are impossible to fulfill.

According to Article 226, a promise of a gift is invalid. A gift is void insofar as it relates to future assets. Agreement between the donor and the recipient is required, as it is a contract and not a unilateral legal transaction. No one may be forced against their will to accept assets free of charge.

We will consider the tax treatment of gift tax separately, taking into account the individual laws.

II. Tax Treatment of Gifts under the Corporate Income Tax Act

1. Taxable Item

The subject of taxation and tax relief under the Corporate Income Tax Act (CITA) are gifts made by legal entities to another person. According to Article 26, No. 7 of the Act, expenses for gifts are not tax-deductible, except in the cases specified in Article 31 CITA, up to the following limits:

A. Deductibility of up to 10% of the net profit if the donations benefit the following institutions:

• Health and medical facilities;
• Social or health-related services for inpatient care in accordance with the Social Services Act;
• Children's nurseries, kindergartens, schools, and universities;
• State-owned enterprises as defined in the Accounting Act;
• Religious communities registered in the country;
• Specialized cooperatives of people with disabilities registered in accordance with Section 83 of the Disability Act;
• People with disabilities and for technical aids for them;
• Persons affected by disasters according to the Disaster Relief Act, or their families;
• the Bulgarian Red Cross;
• socially vulnerable individuals;
• children with disabilities or without parents;
• cultural institutions or for the purposes of cultural, educational, or scientific exchange under an international treaty to which the Republic of Bulgaria is a party;
• non-profit legal entities, with the exception of organizations promoting culture according to the Law on Patronage;
• the Energy Efficiency and Renewable Energy Fund;
• facilities for the treatment of drug addicts, and drug addicts themselves for their treatment;
• UNICEF;
• social enterprises registered in the Register of Social Enterprises for their social activities.

B. Recognition of up to 50% of the balance sheet profit if the donations are made to the following institutions:

• the National Health Insurance Fund in connection with the treatment of children, financed by the Ministry of Health;
• the Center for Assisted Reproduction.

C. Recognition of up to 15% of the net profit if the donations are made in accordance with the Law on Philanthropy.

D. Unrestricted recognition as a donation of computers and their peripherals, provided they were manufactured within one year prior to the date of the donation and are made for the benefit of Bulgarian schools, including universities.

The aforementioned benefits also apply to donations made to individuals identical to those mentioned above who reside in or are nationals of another EU Member State or EEA State. The donor must possess an officially certified document attesting to the recipient's status, issued and authenticated by a competent authority of the respective foreign state, along with a Bulgarian translation prepared by a sworn translator.

An additional and explicit condition is stipulated in Article 31, Paragraph 6 of the Corporate Income Tax Act, according to which expenses for gifts are not tax-deductible if the donation directly or indirectly benefits the executives making it. The same applies if it can be proven that the object of the gift was not received.

According to Section 18 of the Corporate Income Tax Act the following conditions must be met simultaneously for the gift to be recognized as a business expense and for a tax relief to reduce taxable profit to be claimed:

• The taxable company must have generated a profit for the year;
• The donation must be made for the benefit of the aforementioned persons and organizations;
• The amount of the donation must be within the specified limits;
• The accounting expenses for the donation must be documented by receipts;
• The receipt of the donation must be documented by receipts;

There is no specific form or type of document required to certify the transfer and receipt of the gift; however, notarization is required for gifts of real estate and a corresponding form for the transfer of shares. For bearer shares, the gift is made by endorsement. Registered securities are gifted by assignment.

The recipient must issue a document, such as an official memo, a certificate, a thank-you letter, a record, a receipt, etc. This document should contain the following information to acknowledge the gift received: the type of gift, the date of receipt, and the category of person or organization according to Article 31 of the Corporate Income Tax Act.

According to Article 31, paragraph 5, when claiming a tax benefit, the donor, as a taxpayer, determines the amount of tax-deductible donation expenses, whereby the total amount of all deductible donation expenses may not exceed 65 percent of the company's net profit.

III. Tax treatment of the amount of tax benefits according to the Income Tax Act when the donor is a natural person

1. Subject of the Tax Relief

The subject of the tax relief is gifts that, according to Article 22 of the Act, correspond to the sum of the tax bases according to Article 17, namely: income from employment, income from other economic activities, income from the practice of a craft not subject to trade tax, income from letting and leasing, income from the transfer of rights or assets, and income from other sources are reduced to the following extent:

A. by up to 5% of income if the donation is made for the benefit of the following recipients:

the same organizations named in Article 31 of the Corporate Income Tax Law, in the amount of 10% of the net profit, with the exception of:

• persons with disabilities and for technical aids for them;
• persons affected by disasters according to the Disaster Relief Law, or their families, as well as socially disadvantaged persons;

B. Up to 15% of income for donations to cultural causes, in accordance with the Law on Patronage.

C. Up to 50% of income if the donation is made to the National Health Insurance Fund in connection with the treatment of children financed by the Ministry of Health or the Center for Assisted Reproduction.

As with businesses under Article 22, paragraph 2, the total amount of tax benefits for donations is limited and may not exceed 65% of the taxable base as defined in Article 17 of the Income Tax Law.

These benefits also apply to donations to individuals who are identical to the persons mentioned above and who reside in or are nationals of another EU Member State or an EEA State. The donor must have an officially certified document attesting to the recipient's status, issued and certified by a competent authority of the respective foreign state, as well as a translation into Bulgarian prepared by a sworn translator.

2. Valuation of the Gift

According to Article 22, paragraph 3 of the Income Tax Act, the value of a gift in kind corresponds to the acquisition cost shown in the acquisition documents submitted by the donor. An explicit requirement is that the acquisition must have taken place no later than three months before the date of the gift. In all other cases, the value of the gift corresponds to the market price at the time the gifted item was transferred.

3. Procedure for Donors to Claim Tax Relief on Donations

3.1. Via the Employer

By January 31 of the following year, the employer determines the annual tax base and recalculates the annual tax for all employees.

To claim this tax relief, the donations must have been withheld by the employer when the employee's wages were paid and forwarded to the recipient. Between November 30 and December 31 of the tax year, the employee must submit a copy of the documentation to the employer proving that the recipient is among the persons listed in the law and that the donation has been received. The employee must also complete a written declaration stating that, at the time of submission, they have no outstanding public debts or that they will be filing a tax return for the tax year. The employer deducts the tax benefits when recalculating the annual tax due, up to the legally stipulated maximum limits, and reimburses the beneficiary for any tax refund by January 31 of the following year.

3.2. By Filing the Tax Return

Donors who are natural persons file their tax return in accordance with Article 50 of the Income Tax Act within the legally stipulated deadline for the respective tax year. Copies of documents confirming that the recipient qualifies under Article 22, paragraph 1, and that the gift was received must be attached to the tax return. At the time of filing the tax return, the taxpayer must not have any enforceable public debts.

Recipients of a gift declare all movable and immovable property, securities, and cash received as gifts in the respective year in Part II, Code 1025, Schedule 13 of the tax return in accordance with Section 50.

The recipient of a gift is not obligated to complete Schedule 13 of the tax return pursuant to Article 50 of the Income Tax Act. However, they have the right to do so.

The information provided in this schedule does not create a tax liability for the recipient. It serves only as information and is intended to inform the tax authorities that the person possesses more assets than they declared as taxable for the relevant year. This option is advisable in the case of a substantial gift.

IV. Tax Obligations of Donees. Taxation according to the Law on Municipal Taxes and Fees

1. Taxable Items

According to the provisions of Article 44, paragraph 1 of the Law on Municipal Taxes and Fees, real estate acquired by gift, as well as real estate and limited rights thereto, and motor vehicles acquired for consideration, are subject to taxation. Assets acquired free of charge by other means and liabilities discharged by forgiveness are also subject to gift tax.

2. Person Liable for Gift Tax

The tax is payable by the recipient of the assets according to Article 44; in the case of an exchange, by the person acquiring the more valuable asset, unless otherwise agreed. If it is agreed that the tax is to be paid by both parties, they are jointly and severally liable. If the parties have agreed that the tax is to be paid by the transferor, the other party acts as guarantor. If the recipient of the assets is located abroad, the transferor is liable for tax.

3. Tax Base

For real estate, this is the agreed-upon price or the price set by a state or municipal authority. Taxation is based on the assessed value if the agreed-upon price is lower than the assessed value.

For gifts involving foreign currency and precious metals, taxation is based on the central exchange rate of the Bulgarian National Bank.

Shares are taxed at their market value.

Motor vehicles are taxed at their insured value.

4. Tax Rate

The tax rate is set by each municipality as follows:

• 4 to 0.8 percent for gifts between siblings and their children, as well as direct relatives;
• 6 to 6.6 percent of the gift value for gifts from other persons.

The tax is levied in the same way on assets acquired free of charge by other means. In the city of Sofia, the tax rate on gifts is 5%.

5a. Tax Relief pursuant to Section 48 Paragraph 1 of the Municipal Tax Act

The following are exempt from tax:

5.1. Assets acquired from:

a) the State and municipalities;
b) organizations financed from the state budget – in the fields of education, culture, and science, as well as in the field of social and health services for inpatient care;
c) the Bulgarian Red Cross;
d) nationwide organizations of and for people with disabilities;
e) funds for supporting victims of natural disasters and for the protection and restoration of historical and cultural monuments;
f) healthcare facilities pursuant to Article 5 Paragraph 1 of the Law on Healthcare Facilities;
g) religious communities legally registered in the country with regard to assets pursuant to Article 24 Paragraph 1 Item 9;

5.2. Donations for the medical treatment of citizens of an EU Member State or a country covered by the EEA Agreement, as well as for technical aids;

The individual submits a deed of gift stating that the donation is intended for the treatment or technical aids of people with disabilities, along with medical documentation confirming the relevant condition.

5.3. Donations for humanitarian purposes to individuals with a disability of 50 to 100 percent and to socially disadvantaged citizens;

5.4. Donations to non-profit legal entities that receive subsidies from the state budget, as well as those designated to carry out charitable activities with the donations received;

5.5. Customary gifts;

5.6. Assets transferred free of charge to fulfill a legal obligation;

5.7. Donations to public institutions;

5.8. Assets acquired in accordance with the Law on Privatization and Post-Privatization Control;

5.9. Contributions in kind to the capital of a commercial company, a cooperative, or a non-profit legal entity;

5.10. Foreign states for the acquisition of real estate – on the condition of reciprocity;

5.11. Charitable support in accordance with the Law on Patronage.

5b. Tax Relief pursuant to Section 48 Paragraph 2 of the Municipal Charges Act

The assets acquired pursuant to paragraph 1 and their subsequent transfer to third parties are exempt from tax, provided the transfer is related to the fulfillment of the direct objectives for which the organization in question was established pursuant to paragraph 1 or which are stated as the grounds for the tax exemption. If the conditions for the exemption are not met, the uncollected tax becomes due.

5c. Paragraph 1, item 5.1, letters “b”, “c”, “d”, and “e”, and items 5.4 and 5.7 also apply if the assets are acquired from identical or similar persons who are resident in another Member State of the European Union or in a Contracting State of the Agreement on the European Economic Area. The exemption in these cases requires that the person submits an official document certifying their status or capacity in which they acquire the assets, issued or authenticated by the competent authority of the respective state, along with its certified translation into Bulgarian.

6. Deadline for Tax Payment

According to Article 49, paragraph 3, persons who have received assets free of charge or in the form of a gift must pay the tax due within two months of the acquisition.

7. Procedure for Filing a Declaration in Cases of Gratuitous Transfers of Assets

According to Article 49, paragraph 3, recipients of gratuitous transfers of assets and other gifts must file a declaration under the Municipal Tax Act within two months.

Since there is no tax liability under the Municipal Tax Act, no declaration is required in the case of:

• gifts between direct relatives and spouses;
• ordinary gifts;
• assets transferred free of charge to fulfill a legal obligation;
• donations to a non-profit legal entity for the purpose of carrying out charitable activities.

In all other cases, even if no local tax is due, the recipient of the gift must file a declaration under the Municipal Tax Act, stating the reasons for the tax exemption.

8. Tax Practice

The most frequent cases of taxable gifts involve private individuals who have reported monetary gifts from third parties (who are not close relatives) to the Bulgarian tax authorities. This occurs during a tax audit for undeclared income. The audited individual attempts to explain the discrepancy between their assets and financial circumstances and their declared income, as well as their actual income during the audit period, by claiming to have received monetary gifts from third parties. However, even in this case, the amounts received free of charge should have been declared and taxed accordingly. The tax is payable to the municipality where the recipient of the gifts resides. The tax authorities accept only written documentation. A written gift agreement is required. This agreement must be legally valid, and a crucial requirement is that the enrichment of the donor and the reduction of their assets were immediate and irrevocable.

9. Payment

Gift tax due under the Municipal Tax Act is payable to the competent municipality at the beneficiary's place of residence. For real estate and limited rights in rem to it, payment is based on the location of the property; for all other types of gifts, payment is based on the domicile (registered office) of the recipient.

10. Monitoring

The assessment, securing, and collection of gift tax are carried out by the employees of the municipal administration in accordance with the provisions of the Tax and Social Security Code.

11. Penalties

Taxes not paid on time will be collected with interest in accordance with Article 4, Paragraph 2 of the Law on Interest on Taxes, Fees, and Similar State Claims