This article will address the tax treatment of income in Bulgaria from interest on commercial bank accounts, dividends, liquidation shares and stocks pursuant to the Bulgarian Personal Income Tax Act (PITA) obtained from local and foreign persons and entities from a source in Bulgaria as well as from local individuals with a source in abroad - how and what tax rate is levied on such income, within what deadlines and by whom are they reported and paid.

I. Taxation of income in Bulgaria from interest on bank accounts

Under Art. 38, para. 13 of PITA, all interest on the bank accounts of local persons in commercial banks is subject to a final 8% tax, which is determined on the gross amount of the acquired earnings and which is not intended to benefit any tax relief.

The object of taxation in Bulgaria is all interest on bank accounts of any type - deposit, checking or savings, including child deposit accounts.

Taxable persons are only local individuals within the meaning of Art. 4 of PITA. The taxation of the interest earned by foreign individuals within the meaning of Art. 5 of PITA is done in accordance with Art. 37, para. 1, pt. 3 of PITA and is subject to a final 10% tax.

The Bulgarian taxation regime set forth in the aforementioned Art. 38, para. 13 applies to both Bulgarian-sourced and foreign-sourced income from interest, regardless of whether it is a country part of the European Union (EU), the European Economic Area (EEA) or third countries.

There are certain differences in the obligations of local individuals for interest earned on bank accounts in commercial banks in the country and interest in commercial banks abroad.

In cases of interest income earned on bank accounts in commercial banks in the country - the taxation regime as outlined in PITA exempts local individuals - recipients of the income from any obligations to report and / or withhold tax.

The taxation and reporting obligations fall entirely on the banking institutions. They must withhold a final 8% tax on the gross amount of the acquired interest income on bank accounts and report it with the tax return under Art. 55, para. 5 of PITA and Art. 201, para. 1 of CITA by the end of the month following the month of acquisition of the income.

When interest on bank accounts in commercial banks abroad is acquired, the taxation regime under PITA imposes obligations for withholding and reporting of the tax on the local individuals themselves. They must report the tax at the rate of 8% with the tax return under Art. 55 of PITA and Art. 201 of CITA and submit it by the end of the month following the quarter of acquisition of the income.

The tax return in Bulgaria is filed only if the tax is effectively due. This means that if the interest is taxed abroad with a tax of 8% or higher, then the person:

• if there is a DTT in place; or
• in the absence of a DTT on the basis of Art. 76, para. 2 of PITA,

is entitled to a tax credit for the due interest. In this case they do not owe tax in Bulgaria. However, if the interest is not taxed abroad or the tax paid abroad is below 8%, then the person must pay additional tax and submit a quarterly Statement under Art. 55 of PITA and Art. 201 of CITA, including the fourth quarter, giving the tax amount for the quarter.

Nevertheless, regardless of whether tax was due in Bulgaria or not, all local individuals who received income from interest on bank accounts in commercial banks abroad must submit an annual tax return under Art. 50 of PITA and complete Appendix № 8 to the annual tax return under Art. 50 of PITA, where they only informatively state the amount of the acquired interest and tax due thereon.

II.Taxation of income from dividends

According to the tax treatment under Bulgarian PITA, depending on the recipient and source of income, dividends can be separated into four groups:

• dividends in favor of a local individual from a source in Bulgaria (i.e. from local legal entities);
• dividends in favor of a foreign individual from a source in Bulgaria;
• dividends in favor of local individual from a source abroad (i.e. from foreign legal entities); and
• dividends in favor of a sole trader (ST), regardless of the source of income (Art. 38, para. 1 PITA).

§ 1, pt. 5 of the Supplementary provisions (SP) of Bulgarian PITA contains the definition of "dividend" which the legislator envisaged as:

• income from shares;
• income from participations including in unincorporated associations and other rights treated as income from shares;
• concealed distribution of profits within the meaning of the definition used in CITA (i.e. § 1, pt. 8 of the SP of PITA).

In all four cases the tax in Bulgaria is on the gross amount of the dividends determined by a minutes decision for dividend distribution, subject to a final 5% tax (Art. 38, para. 2 and Art. 46, para. 3 PITA).

The individual cases will be examined below:

1. Tax treatment of dividends distributed to a local or foreign person from a source in Bulgaria
In this case, the object of taxation is income received from dividends both in cash and in kind. Upon payment of dividends in kind, e.g. in the form of real estate, the object of taxation is the market value of the property provided as a dividend at the time of the decision for the distribution of dividends in kind.

With respect to the tax treatment of dividends in Bulgaria distributed to local and foreign individuals, we would like to point out the fact that the taxable person within the meaning of Art. 3, pt. 2 of PITA is the local entity - payer of the income, which is required to withhold and pay the final tax of 5% by the end of the month following the quarter in which it was decided to distribute the dividends (Art. 65, para. 2 of PITA). The taxable person submits the tax return under Art. 55, para. 1 of PITA and Art. 201, para. 1 of CITA in person or by proxy at the offices of the NRA, by registered mail or electronically - online using an electronic signature. PITA does not require the payment of dividends to be documented by a specific document neither by the recipient nor the payer of the income. Dividends from a source in the country are not reported by their recipient in the annual tax return under Art. 50 of PITA.

2. Tax treatment of dividends distributed to a local individual from a source abroad
In this case, dividends are subject to reporting in the annual tax return under Art. 50 of PITA (Art. 52, para. 1, p. 4 of PITA in conjunction with Art. 50, para. 1, p. 3 of PITA).

We would like to note that upon receipt of dividends from a source abroad the person receiving the income should tax themselves - i.e. pay a final 5% tax on their gross amount (Art. 38, para. 1, pt. 2, letter "b" and para. 2 of PITA and Art. 46, para. 3 of PITA). In other words, dividends originating abroad are taxed by the recipient with 5% and are reported in the tax return in Bulgaria under Art. 55, para. 1 of PITA and Art. 201, para. 1 of CITA, if the dividends are not taxed abroad or the tax withheld abroad is lower than 5% and the difference up to the 5% should be paid additionally (Art. 55, para. 2 and Art. 67, para. 1 of PITA). The tax is due by the end of the month following the quarter in which the dividends were acquired (Art. 67, para. 1 of PITA, in conjunction with Art. 46, para. 4 of PITA).

If the dividends were taxed abroad, the person could avoid double taxation when:

• there is a DTT and the appropriate methods for avoiding double taxation are applied as set out in the DTT (most commonly the method of ordinary tax credit, i.e. deducting the foreign tax paid from the amount of tax payable in Bulgaria).
• there is no DTT and the method of ordinary tax credit is applied.

Dividends from a source abroad are reported informatively by their recipient in the annual tax return under Art. 50 of PITA in all cases, regardless of whether the tax is due in the country or not.

3. Tax treatment of dividends distributed to Sole Traders (ST)
Under PITA, dividends distributed to ST should always be subject to a 5% tax (Art. 38, para. 1 and Art. 46, para. 3 of PITA). The formed dividend income in Bulgaria is treated in the manner regulated by CITA. Therefore, we will only share that from the formation of the taxable income of ST:

• revenue resulting from a distribution of dividends by local legal entities, by foreign persons who are resident for tax purposes in a EU Member State or by another state - party to the EEA Agreement is not recognized (deducted) (Art. 27 of CITA);
• revenue resulting from a distribution of dividends by foreign entities outside the EU and EEA is recognized (subject to taxation).

III. Taxation of income from liquidation shares in Bulgaria

A final 5% tax is levied on income from liquidation shares in favor of local or foreign individuals from a source in Bulgaria and of local individuals from a source abroad. The final tax on income from liquidation shares is determined as the positive difference between the value of the liquidation share and the documented cost of acquisition of the share in the company/corporation. The complete Bulgarian definition of the term “liquidation share” is given in § 1. of the Supplementary provisions of PITA.

Income from liquidation shares with a source in the country is not reported by the recipient in the annual tax return under Art. 50 of PITA. It must be reported only by the enterprise - payer of the income in the tax return under Art. 55, para. 1 of PITA and Art. 201, para. 1 of CITA as well as the Statement under Art. 73 of PITA. In the event that a local individual receives income from liquidation shares from a source abroad, the income is subject to a 5% tax by the recipient reported in the tax return under Art. 55, para. 1 of PITA and Art. 201, para. 1 of CITA, if the liquidation shares are not taxed abroad or the withholding tax abroad is lower than 5%, the difference to 5% should be paid additionally (Art. 55, para. 2 and Art. 67, para. 1 of PITA). If the tax withheld abroad is equal to or greater than 5%, no tax is due and the tax return under Art. 55, para. 1 of PITA and Art. 201, para. 1 of CITA must not be filed. The local individual, however, should in any case report informatively in the annual tax return under Art. 50 of PITA the income received from the liquidation shares (regardless of whether the tax is due in the country or not).

IV. Taxation of income from shares and stocks in companies upon exchange of shares in companies abroad

According to Art. 38, para. 5, a final tax is levied on income from the exchange of shares and stocks in connection with the transformation of companies under Chapter XIX, Section II of CITA:

• from local individuals in the exchange of shares and stocks in local companies for shares and stocks in local companies or in companies abroad;
• from local individuals in exchange of shares and stocks in companies abroad for shares and stocks in companies abroad or in local companies;
• from foreign individuals in exchange of shares and stocks in local companies for shares and stocks in local companies or in companies abroad.

The taxable income under para. 5 is determined in Bulgaria at the time of the exchange and is formed as the positive difference between the market price of the replacement shares / stocks and the acquisition price under Art. 33, para. 6 of the shares/stocks of the transferring company.

The taxable income in exchange for shares and stocks in companies both in the country and abroad are subject to a final 10% tax pursuant to Art. 67, para. 1 of PITA by their recipient (Art. 65, para. 6 of PITA) and is reported in the Statement under Art. 55, para. 1 of PITA and Art. 201, para. 1 of CITA by the end of the month following the quarter of acquisition of the income.

In cases where the income from the exchange is from a foreign source, withholding tax and reporting pursuant to Art. 67, para. 1 of PITA is done only if the income is not taxed abroad or the withholding tax abroad is lower than 10% and the difference to 10% should be paid (Art. 55, para. 2 and Art. 67 para. 1 of PITA). If the withheld tax abroad is equal to or exceeds 10%, no tax is due and the tax return under Art. 55, para. 1 of PITA and Art. 201, para. 1 of CITA must not be submitted.

When the income from the replacement has a foreign source, it should be reported informatively by their recipient in the annual tax return under Art. 50 of PITA, regardless of whether the tax is due in the country.

For Bulgarian-sourced income from replacements the legislation does not impose an obligation on the recipient of the income to report it in the annual tax return under Art. 50 of PITA. The enterprise - payer of the income must report this income in the Statement under Art. 73 of PITA.

In case the above taxes are undeclared or declared outside the statutory deadlines, a fine of up to BGN 500 is laid down in law, and a doubled fine for a repeated violation.

At the end of this article we would like to mention some types of income which are exempt under Art. 13 of Bulgarian PITA, namely:

• distributed earnings in the form of new shares and stocks or other source of equity capital in companies, as well as the distributed earnings or another source of equity capital in the form of increasing the nominal value of existing shares;
• interest and discounts from Bulgarian government, municipal and corporate bonds, as well as similar bonds issued under the laws of another Member State of the EU or a country - party to the EEA Agreement;
• income from compulsory insurance in Bulgaria or abroad;
• income from rent, lease or other granting of the use of agricultural land, and others.