I. The representation costs from the perspective of the Bulgarian VAT Act

1. Which expenses are known as representation costs?
Art. 62, Para. 1 of the Regulation on the Implementation of the Value Added Tax Act () provides a legal definition for representation costs. According to this definition, representation costs are the expenses that serve for representative and entertainment purposes, Essentially, they can be grouped as follows:

• reception, stay and seeing off guests and delegations;
• accommodations;
• food and beverages consumption;
• organization of business meetings;
• celebrations, entertainment events;
• excursions.

In other words, all expenses associated with the company’s business activities that serve an entertainment purpose, such as a business lunch or the organisation of team-building outings, may be classified as representative expenses and recognised as business expenses.

However, a distinction must be made between the costs described above and expenses incurred for the organisation of meetings, congresses, conferences and similar events which serve the direct presentation or testing of the services or goods offered by the person within the scope of their independent economic activity; such expenses do not constitute entertainment expenses (Art. 62(2)).

2. Is the tax recovery applicable for the representation costs?
The right of tax credit deduction shall not be available in case the goods or the services are designated for representative or entertaining purposes. (Art. 70, Para 1, It. 3) For this reason, the tax base of the representation costs also includes the corresponding VAT rate.

II. The representation costs from the perspective of the Bulgarian Corporate Income Tax Act

Within the provisions of the Corporate Income Taxation Act, the concept of representation costs is not clearly defined and with this regard, according to the Law on Legislation and the established tax theory and policy for the purposes of corporate taxation according, the definition of representation costs according to the Regulation on the Implementation of the Value Added Tax Act shall apply.

1. Recognition of the representative costs
An expense must meet the following criteria in order to be recognised as a business representation cost:

• The costs shall be commercially viable - an essential condition for the recognition of expenses as such is the reliable determination of their relationship with the business of the enterprise; d. H. it is a current or future benefit for the company to prove.
• Proof of business necessity under Section 10 of the Corporation Tax Act – for tax purposes, an expense is only recognised in the profit and loss account upon presentation of a primary accounting document. In other words, an invoice is required for an expense to be recognised. The law provides for an exception for representation costs, in that for recognition for tax purposes, the presentation of a cash register receipt (Section 10(6)) is sufficient. For a business meal, therefore, it is not a problem if you do not receive an invoice from the restaurant; these expenses are classified as deductible business expenses, provided that their business-related nature can be demonstrated.

2. Taxation of representation costs
Once representative expenses are recognized, they shall also be subject to a 10% tax on expenses at the end of the year. This tax is separate from the corporate tax, which is the same rate. Taxable persons are all persons who have accounted for representative expenses and are subject of paying of corporate tax. The tax base for determining the tax on representative expenses is the representative expenses accrued for the calendar year (VAT included). The tax shall be declared and paid no later than June 31 of the following year with an annual tax return according to Art. 92, Corporate Income Taxation Act.

3. What effect do taxes on representation costs have?

The representative costs, together with the tax due on them, reduce tax profit of the company and therefore corporate tax.

A more detailed explanation using the following example: a company that had no entertainment expenses reports a profit of €5,000 and is therefore liable for corporation tax of €500. However, if the company had recorded deductible entertainment expenses of €1,000, tax of €100 is payable on the operating income, thus reducing the company’s profit by €1,100 (entertainment expenses + tax on operating income), resulting in a profit of €3,900, on which €390 is payable in tax. This results in a total tax liability of €490, i.e. a lower tax bill.