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TAXATION

Direct Taxation of Corporations

The taxation of corporate income and profi ts is governed by the Corporate Income Tax Act (“CITA”). In connection with the accession of Bulgaria to the European Union since January 1st 2007, a new CITA was adopted to meet the necessity of harmonization of Bulgarian taxation legislation with the requirements of the European directives concerning direct taxation. Another reason for passing a new act in the field herein is to make perception and application of the corporate taxation easier for the taxable persons and for the revenue administration. Apart from the corporate income tax which is charged on the corporate profi ts, CITA also regulates certain other taxes, such as:

• A tax alternative to corporation tax shall be levied on: gambling businesses; the income accruing to public-fi nanced enterprises from commercial transactions, as well as from letting movable and immovable property; the vessels operation activity;

• Taxes on corporate expenses. Any expenses defined as compulsory by a statutory instrument shall be recognized for tax purposes and shall not attract a tax on expenses;

• Withholding tax on income accruing to any resident and non-resident legal persons.

VII.1.1. Taxable Persons

Taxable persons are:

• the resident legal persons;

• the non-resident legal persons which carry out economic activity in the Republic of Bulgaria through a permanent establishment or which receive income from a source inside the Republic of Bulgaria;

• the sole traders: in respect of the taxes withheld at source and in the cases specified in the Income Taxes on Natural

Persons Act (when they perform activities liable to taxes alternative to corporation tax);

• the natural persons who are merchants within the meaning given by Article 1 (3) of the Commerce Act (persons who have established a business, which in accordance with its purposes and volume requires that its activities be conducted

on a commercial basis) : in the cases specifi ed in the Income Taxes on Natural Persons Act ;

• the employers and the commissioning entities under contracts for management and control: in respect of the tax on the

expenses on fringe benefi ts. For the purposes of taxation of income from a source inside the Republic of Bulgaria, any

non-resident organizationally and economically distinct formation (trust, fund and other such), which independently carries out economic activity or performs and manages investments, shall likewise be a taxable person where the

owner of the income cannot be identifi ed. A signifi cant amendment in corporate taxation is that legal entities are no longer liable to fi nal annual (license) tax whatever their activity is. Pursuant to the previous CITA legal entities

that perform specifi c activities and have annual turnover less than 50000 lv were liable to the mentioned final tax.

VII.1.2. Corporate Income Tax

Corporate income tax in Bulgaria applies in a single rate of 10%.

VII.1.3. Profits Subject to Tax

Bulgarian resident companies are subject to Bulgarian tax on their world-wide profi ts. Companies that are non-residents in Bulgaria are liable to taxes in respect of the profi ts gained through a permanent establishment in the Republic

of Bulgaria and of the income specifi ed in the CITA accruing from a source inside the Republic of Bulgaria..1.

A company is resident in Bulgaria if it is incorporated (registered) pursuant to Bulgarian legislation. Resident companies are also any companies incorporated under Council Regulation (EC) No 2157/2001, and any cooperative society incorporated under Council Regulation No 1435/2003, where the registered offi ce thereof is situated in the country and they are entered into a Bulgarian register. Most of the taxation rules, including the major rules relating to tax incentives, apply equally to resident and non-resident corporations conducting activities through a Bulgarian permanent

establishment.

VII.1.4. Determination of Profits for Tax Purposes

Profi ts are determined in accordance with the generally accepted accounting principles (provided for in the respective accounting standards),subject to adjustments for tax purposes. Currently, the corporate taxpayers should mandatory apply the International Financial Reporting Standards (IFRS) adopted by the European Commission for accounting purposes and approved by the Bulgarian Council of Ministers. There is a statutory requirement for banks, insurance companies, other fi nancial institutions and public companies to apply IFRS as a primary accounting basis. Legal entities

that qualify for small and medium size enterprises (SME) may choose whether to apply the IFRS or the Bulgarian Generally Accepted Accounting Principles (BGAAP). SMEs that are eligible to apply the BGAAP are enterprises

with personnel less than 250 people and annual turnover up to BGN 15 million or with total value of the non-current tangible assets not exceeding BGN 8 million. Accounts are to be prepared in Bulgarian Leva (BGN), regardless of the functional currency of the respective company. Generally, the taxable profi t (pursuant to the terminology in the CITA the taxable profi t is called “tax fi nancial result”) is determined in accordance with the accounting fi nancial result

adjusted for tax purposes for: the permanent tax differences; the temporary tax differences and specifi c amounts provided in the CITA.

• The permanent tax differences are sums which affect the tax fi nancial result only once. They are accounting income or expenses which are not recognized for tax purposes and in this regard for the purposes of determination of the tax fi nancial result, where this CITA indicates that:

- a cost (loss) is not recognized for tax purposes, the accounting fi nancial result shall be credited with any such cost (loss) in the year of accounting for the said cost (loss), and the accounting fi nancial results shall not be adjusted during the succeeding years;

- an income (profi t) is not recognized for tax purposes, the accounting fi nancial result shall be debited with any such income (profi t) in the year of accounting for the said income (profi t), and the accounting fi nancial results shall not be adjusted during the succeeding years. Thus, the expenses or income, not recognized for tax purposes, defi ned as a permanent tax difference, shall never be recognized, i.e. the taxable result shall be increased with the

relevant expense in the year of its accounting and thus shall increase the taxable profi t, and shall not affect the tax result any more. For example the following accounting expenses shall not be recognized for tax purposes:

any non-business expenses; any expenses on fi nes charged, forfeitures and other sanctions imposed for violation of statutory instruments, any default interest charged for late payment of public state or municipal debts etc. The

accounting expenses on donations to a total amount of up to 10 per cent of the positive accounting fi nancial result (accounting profi t) shall be recognized for tax purposes where the expenses on donations are incurred in favor of specifi c institutions or enterprises and many others. The following accounting income shall not be recognized for tax purposes: any income resulting from distribution of dividends by resident legal persons; any income from interest payments on unduly remitted or collected, public obligations, as well as on value added tax not refunded within the statutory time limits, charged by the central-government or municipal authorities. For the fi rst time in Bulgarian corporate tax legislation the new CITA provides regulation regarding accounting expenses on incorporation of a legal entity. These expenses are not recognized for tax purposes at the incorporators. The unrecognized expenses shall be recognized for tax purposes upon determination of the tax fi nancial result of the newly established legal person in the year of commencement of the legal existence thereof. The tax law provides the hypothesis that the legal entity is not established despite all the efforts of the

incorporators. In this case expenses referred to herein shall be recognized for tax purposes upon occurrence of circumstances determining that the legal existence of a new legal person will not commence. The said expenses shall

be recognized in the year of occurrence of the said circumstances. Since 1 January 2008 a new type of expenses

is included in the expenses which are not recognized for tax purposes and represent a permanent tax difference. These are the expenses which constitute hidden profi t distribution. The defi nition of “hidden profi t distribution” is also amended – it shall be: any expenses, charged by a taxable person without being connected with the economic activity carried out thereby or exceeding the customary market levels, in the cases where made in favour of shareholders, members or any parties related thereto; any expenses on interest payments charged (unless the conditions of the loan are agreed in conformity with requirements provided for in a statutory instrument) where certain conditions are fulfi lled. Till the end of 2007 only the income from such distribution was regulated and a penalty in the amount of 50 % of the

expense was provided for entities, performing such distribution. Presently, these expenses are not recognized for tax purposes and the taxable profi t shall be increased with themIn the same time the amount of the penalty is decreased to 20 % of the expense.

• The temporary tax differences affect the tax fi nancial result for more than one accounting period. They are accounting

income or expenses which are recognized for tax purposes in a tax period other than the year of accounting of the said income or expense, which is due to the specifi

c of the respective transactions. The mechanism by which the temporary tax differences affect the tax result is similar

to the one pointed out above concerning the permanent tax differences. In particular, where an expense is defi ned as a

temporary tax difference, in the period of its accounting the taxable profi t shall be increased thereby, but in a subsequent tax period upon occurrence of certain circumstances, determined by the law, these expenses shall be recognized for tax purposes and thus shall affect again the tax result by decreasing it. An example of temporary tax differences are interest costs. Interest costs are normally deductible on accrual basis, subject to the limitations provided in the Bulgarian thin capitalization rules. The latter apply to substantially allforms of fi nancing, except for: 1) any interest

payments on fi nancial leases and bank loans, except where the parties to the transaction are related parties or the lease or the loan, as the case may be, is guaranteed or secured by or is extended on the order of a related party; 2) any penalty charges for late payments and damages; 3) any interest unrecognized for tax purposes on other grounds in CITA. Under the thin capitalization rules, if the debtequityratio of the taxpayer does not exceed 3:1 as of the end of the respective calendar year the interest costs can be deducted for tax purposes in full. If the debt equity ratio is higher than 3:1, then the maximum tax deductible portion could not exceed the sum of the interest income of the taxpayer and 75% of the accounting fi nancial result before all expenses on interest payments and income from interest receivable. The portion that appears to be nondeductible in the current year can be carried forward and deducted in the following fi ve

years, subject to the formula described above. A general rule is that an accounting expense shall be recognized for tax purposes where it issupported by an accounting source document within the meaning given by the Accountancy Act. An accounting expense shall be recognized for tax purposes even where part of the information required under the Accountancy Act

s missing in the accounting source document, provided that documents certifying any such missing information are available. There are some other exceptions, provided in the law.The law enumerates some amounts with which the tax fi nancial result is adjusted:

• Where the disposition of any shares and any negotiable rights attaching to shares in public companies, shares in and units of collective investment schemes, is effected on a regulated Bulgarian securities market, upon determination of the tax fi nancial result the accounting fi nancial result:- shall be debited with the profi t determined as a positive difference between the selling price and the documented cost of acquisition of the said securities, and - shall be credited with the loss determined as a negative difference between the selling price and the documented cost of acquisition of the said securities.

• Tax treatment of debts. Upon determination of the tax fi nancial result, the accounting fi nancial result shall be credited with the amount of the debts of the taxable person,and the said crediting shall be effected in the year in which one of the following circumstances occurs:

- the debts are extinguished by prescription, but not more than fi ve years after the time when the debt became exigible;

- the bankruptcy proceedings against the taxable person have been closed by a confi rmed plan for rehabilitation which

provides for incomplete satisfaction of the creditors; the crediting shall be effected by the amount of the diminution in the debt;

- an effective judgment of court has decreed that the debt or part thereof is undue;

- the creditor has relinquished the claim  thereof by a judicial procedure or has redeemed the said claim; the crediting shall be effected by the amount redeemed;

- before the lapse of the prescription period, the debts have been extinguished by virtue of a law;

- the taxable person has submitted a motion for expungement.

VII.1.5. Valuation of Depreciable Assets for Tax Purposes. Depreciation and Amortization

Tax depreciable assets are

• the tax tangible fi xed assets;

• the tax intangible fi xed assets;

• the investment properties, with the exception of land;

• the subsequent expenses associated withasset written off from the tax depreciation schedule Goodwill generated as a result of a business combination is not a tax depreciable asset. Any loss from impairment and upon write-off of goodwill shall not be recognized for tax purposes. Taxable persons who form a tax fi nancial result prepare and keep a tax depreciation schedule, posting therein all tax depreciable assets. The tax depreciation schedule is a tax ledger wherein the information, regarding the process of acquisition, subsequent keeping, depreciation and write-off of the tax  depreciable assets, shall be posted.Depreciable assets are valued for tax purposes at historical acquisition cost. Additions and improvements to such assets are recognized as separate depreciable assets and are subject to depreciation in accordance to the tax rates applicable to the main asset.

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The depreciable assets are divided into several categories:

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

• Category II: machinery, process equipment, apparatus;

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

• Category IV: computers, computer peripheral equipment, software, and right to use software, mobile phones;

• Category V: automobiles;

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

• Category VII: all other depreciable assets. The annual rate of tax depreciation is determined on a single occasion for the year and may not exceed the following amounts:

Asset category Annual rate of tax depreciation (%)

I 4

II 30

III 10

IV 50

V 25

Tax depreciation rates can be freely chosen by taxpayer, within the above maximum rates, and are not linked to the accounting depreciation rates or the useful life of the asset. The choice of the applicable tax depreciation rates can be changed each calendar year and the change applies prospectively.

VII.1.6. Utilization of Losses

The tax loss can be carried forward for five consecutive years to offset the taxable profit reported in these years. Losses cannot be carried back. According to the new CITA (unlike the previous one) the taxable person is entitled to choose whether to carry forward losses or not. The taxable person can exercise the right thereof by means of deduction of the tax loss during the fi rst year after incurrence of a tax loss, during which the said person has formed a positive tax fi nancial result before deduction of the tax loss. If the taxable person has not formed a positive tax fi nancial result before deduction of the tax loss until the date of tax control, the person shall be presumed to have exercised the right thereof to election which means that the term is preclusive. The company is not obliged to submit any returns, therefore it notifi es the revenue administration by its annual return. Another innovation is that the tax loss must be deducted upon determination of the tax financial result within the total amount of the positive tax fi nancial result before deduction of

the tax loss. Where the tax loss is less than the positive tax fi nancial result before deduction of the tax loss, the full  amount of the said loss shall be deducted upon determination of the tax fi nancial result. The tax loss shall furthermore

be deducted upon determination of the quarterly prepayments of corporation tax. Any tax loss, formed during the current year in a State wherewith the Republic of Bulgaria has concluded a convention for the avoidance of double taxation and the method of avoidance of double taxation with respect to profi ts is exemption with progression, shall not be deducted

from the tax profi ts from a source inside the country or other States during the current or succeeding years. The tax loss referred to herein shall be deducted in compliance with the requirements of this Chapter successively solely from the tax profi ts from the source  outside Bulgaria from which the said loss has been incurred during the next succeeding fi ve

years. Where a taxable person has formed a tax loss and the said loss or a part thereof has its source outside Bulgaria in respect of which source the credit method for avoidance of double taxation is applied, the loss which is not deducted during the current year shall be deducted during the next succeeding five years in compliance with the requirements of

this Chapter successively solely from the tax profi ts from the source outside Bulgaria from which the said loss has been incurred.

VII.1.7. Group Taxation. Transactions Between Related Parties

There is no group taxation in Bulgaria. Each entity is taxed as a separate taxpayer. Bulgaria has tax rules regulating the tax deductions and the taxable revenue from transactions between related parties (“the transfer pricing rules”). Transfer pricing rules apply to both domestic and international transactions between related parties. The Bulgarian transfer pricing rules are broadly similar to the generally accepted OECD standards that could be seen in the EU and OECD countries.

VII.1.8. Tax reporting and Tax Payments

In Bulgaria the tax year coincides with the calendar year. The taxable persons must submit an annual tax return in a standard form regarding the tax fi nancial result and the annual corporation tax due on or before the 31st day of March of the next succeeding year. Any taxable person, who fails to submit such a tax return or fails to submit it within the legal term or fails to state or misstates any particulars or circumstances leading to underassessment of the tax due or to undue reduction, retention of or exemption from tax, shall be liable to a pecuniary penalty of BGN 500 or exceeding

this amount but not exceeding BGN 3,000. The corporate income tax is paid through making monthly/quarterly provisional tax payments. Monthly tax prepayments are made by taxable persons who have formed a tax

profi t for the last preceding year. Quarterly tax prepayments are made by taxable persons who are under no obligation to make monthly tax prepayments. The monthly prepayments are generally based on the tax profi t for the

preceding year, adjusted for economic indicators. Monthly tax prepayments are remitted on or before the 15th day of the month to which the said prepayments apply. Quarterly tax prepayments are remitted on or before the 15th day of the month next succeeding the quarter to which the said prepayments apply. No quarterly tax prepayments are made for the

fourth quarter. An annual balancing payment is made before the 31st day of March of the next succeeding year. It is calculated as a balance between the  annual tax liabilities reported in the tax return and monthly provisional installments paid.

VII.1.9. Intra-community Dividends With regard to the accession of the Republic of Bulgaria since January 1st 2007 a new chapter of the CITA was passed – “Intra-community dividends” which implements Directive 90/435. Pursuant to these provisions the pressure of taxation and tax treatment is equal for transactions between Bulgarian legal entities

and between companies seated in different member states.

VII.2. Corporation Tax Reduction,

Retention and Exemption

VII.2.1. Corporation Tax Retention

Corporation tax retention is the right of a taxable person not to remit to the executive budget the amounts of corporation tax, which subsist in the patrimony of the taxable person and are spent for purposes prescribed by a law. CITA provides some specifi c requirements for the taxable persons in order to be entitled to take advantage of tax retention.

VII.2.2. Corporation Tax Exemption

Collective investment schemes, which have been admitted to public offering in the Republic of Bulgaria, and licensed investment companies of the closed-end type under the Public Offering of Securities Act, are exempt from the levy of corporation tax.

Special purpose investment companies under the Special Purpose Investment Companies Act are exempt from the levy of corporation tax, too.

VII.2.3. Corporation Tax Incentives

Corporation tax incentives are divided into General tax incentives, Regional incentives and Employment incentives.

The General incentives on their part are:1) tax incentives upon hiring of unemployed persons (such legal entities are entitled to debit the accounting fi nancial result by the amounts paid for labor remuneration and the contributions

remitted for the account of the employer to the public social insurance funds and the National Health Insurance Fund during the fi rst twelve months after the hiring); 2) incentives for enterprises hiring people with disabilities (these taxable persons are allowed to retain 100 % of the corporation tax under certain conditions); 3) incentives for agricultural  producers (they are allowed to retain 60 % of the corporation tax under specifi c conditions) etc.

The regional tax incentives.

Bulgarian Corporate Income Tax Act was recently (in force as of 01.01.2008) heavily amended in the area of state aid. The new provisions, basically arrange specifi c forms of tax retention, admissible under certain conditions, as defi ned by law.

• Tax relief, representing state aid for regional development – it is allowed under the condition that the retained tax shall

be invested in assets, necessary for the performance of initial investment. The law also requires the initial investment to be made within four years after the beginning of the year for which the tax was retained; the initial investment to be made in municipalities where the rate of unemployment for the year of retention is by 35 per cent or more higher than the national average for the same period etc. The taxable entity is required to perform all its manufacturing activity only in municipalities where the rate of unemployment for the year preceding the current year is by 35 per cent or more higher than the national average for the same period. In this case the taxable person is entitled to retain 100 % of the corporate tax. A positive opinion of the European Commission is required for providing of such state aid; • Tax relief, representing minimum state aid – it is limited within certain amounts of state aid, determined by law. The retained tax must be invested in material or immaterial fi xed assets within four years after the beginning of the year for which the tax

is retained. Again, a precondition for the availability of this aid is the taxable person to perform its manufacturing activity only in municipalities where the rate of unemployment for the year preceding the current year is by 35 per cent or more higher than the national average for the same period. In this case the taxable person is entitled to retain 100 % of the corporate tax. The tax legislation provides for specifi c requirements for the different types of state aid.

Employment incentives. Upon determination of the tax fi nancial result, the accounting fi nancial result may be debited with the compulsory social insurance contributions remitted for the current year for the account of the employer in  respect of the newly created jobs. The said reduction is allowed on a single occasion in the year during which the persons are appointed. The right herein shall accrue subject to the condition that the jobs have been created in municipalities where the rate of unemployment for the year preceding the current year is by 50 per cent or more higher than the national average for the same period. Some conditions must be fulfi lled for this reduction to be available: according to European Commission Regulation (EC) No 2204/2002, including:

• the average number of employees for the current year must have increased compared to the preceding year as a result of the newly created jobs, and persons registered as unemployed must be appointed to the newly created jobs under an employment contract;

• the newly created jobs must be maintained for a minimum period of three years;

• the State aid referred to herein, together with other State aids for employment in respect of the same newly created  jobs, must not exceed 50 per cent of the cost of wages and compulsory social insurance contributions for the newly created jobs for two years;

• the State aid, together with other regional aids and State aids for employment, must not exceed 50 per cent of the sum total of the initial investment and the cost of wages and compulsory social insurance contributions for newly created jobs, related to the initial investment, for two years. Where the State aid for employment referred to herein, including other State aids for employment, exceeds BGN 30 million for three years, the reduction shall be valid if the taxable

person has been granted a permissibility authorization by the European Commission under the terms and according to the procedure established by the State Aids Act.

VII.3. Alternative Taxes

VII.3.1. Gambling businesses

The taxable amount for assessment of the tax on gambling activities of toto and lotto, betting on the outcome of a sports competition and uncertain events is the value of the bets taken for each game and the tax rate is 10%.

The taxable amount for assessment of the tax on gambling activities of lotteries, raffl es and bingo and keno numbers lotteries is the nominal value of the bet as specifi ed in coupons, cards, tickets or other tokens certifying participation and the tax rate is 12%. The taxable amount for assessment of the tax on gambling activity of games where the value of the bet consists in an increased charge for a telephone or another telecommunication link is the increase in the charge for

the telephone or telecommunication link. The tax rate is 12%

VII.3.2. Tax on Public-fi nanced Enterprise Income

Any income accruing to public-fi nanced enterprise from commercial transactions covered under Article 1 of the Commerce Act, as well as from rent of movable and immovable property, shall attract a tax on income. The monthly  axable amount is the income accruing to the public-fi nanced enterprise during the relevant month. The annual taxable amount is the respective income accruing to the publicfi nanced enterprise during the relevant year. The tax rate is 3 %. The rate of tax on income accruing to the municipalities is 2 %.

VII.3.3. Tax on Vessels Operation Activity

Taxable persons are the persons carrying out maritime merchant shipping which simultaneously fulfi ll the following conditions:

• they are corporations registered under the Commerce Act, or permanent establishments of a corporation which

is resident for tax purposes in another Member State of the European Community, or a Member State of the European

Economic Area, according to the relevant tax legislation and by virtue of a convention for the avoidance of double taxation with a third State is not considered to be resident for tax purposes in another State outside the European Community or the European Economic Area;

• they operate their own vessels or chartered vessels, or manage vessels under a contract of management, as well as

charter vessels;

• they do not refuse to train apprentices on board the vessels, with the exception of  the cases where the number of apprentices exceeds one per fi fteen offi cer members of the ship’s complement;

• they man the vessel with Bulgarian  citizens or with nationals of other Member States of the European Community or of

the European Economic Area;

• vessels fl ying the Bulgarian fl ag or a flag of another Member State of the European Community or of the European Economic Area account for at least 60 per cent of the net tonnage of the vessels operated. These persons may elect their activity to attract a tax on vessels operations activity. The tax shall be levied on the taxable persons who

have elected to be liable for the said tax for a period not exceeding fi ve years. The tax rate is 10%.

VII.4. Tax on Corporate Expenses

Bulgaria levies taxes on certain expenses. The taxes are charged monthly. The expense and the tax thereon shall be recognized for tax purposes in the year of charging and shall not form a temporary tax difference. In case the taxable

person has over remitted any tax on expenses or any corporation tax, the said tax may be deducted from the tax on expenses due.

The tax rate for taxes on all kinds of expenses is 10%. With regard to the fact that the tax on expenses is recognized for tax purposes, the effective tax rate is 9% The following expenses, supported by documents, are subject to tax on  xpenses:

VII.4.1. Business Entertainment Expenses

Taxable persons are the persons which are subject to levy of corporation tax. Therefore the expenses of legal entities, subject to alternative tax, are not levied with the tax herein. The tax is levied on the gross amount of business  entertainment expenses for the respective month.

VII.4.2. Benefi ts to the Personnel (“Social Expenses”)

The taxable expenses are expenses on fringe benefi ts provided in kind to factory and offi ce workers and to persons hired under a management and control contracts (hired persons). These expenses furthermore include:

• the expenses on contributions (premiums) for voluntary retirement and health insurance and voluntary unemployment

and/or vocational-training insurance, and/ or life assurance and life assurance linked to an investment fund;

• the expenses on food vouchers Expenses on fringe benefi ts, which are not provided in kind and which constitute income of a natural person, are taxed under the terms and according to the procedure established by the Income Taxes on Natural Persons Act. Taxable persons are all employers or commissioning entities under management and

control contracts. No tax shall be levied on expenses on fringe benefi ts not exceeding the amount of BGN 60

per month per hired person, where the taxable persons do not incur any coercively enforceable public obligations at the time of incurrence of the expenses. No tax shall be levied on expenses not exceeding the amount of BGN 40 per

month, provided in the form of food vouchers to each hired person if certain conditions are fulfi lled.

No tax shall be levied on any expenses on fringe benefi ts incurred on transportation of factory and offi ce workers and of persons hired under a management and control contract from the place of residence to the place of work and back. The latter does not apply if any such transportation is carried out by passenger car or by extra bus services. However the

expenses herein shall not be levied with tax if the transportation of factory and offi ce workers is carried out by passenger car to inaccessible and remote areas and the taxable person cannot ensure the implementation of the activity

thereof without incurrence of the expense.The taxable amount for assessment of the tax on social expenses is the expenses on fringe benefi ts provided in kind debited with the income related to the said expenses for the relevant month. The taxable amount for assessment of the tax on expenses on contributions (premiums) for voluntary retirement

and health insurance and voluntary unemployment and/or vocational-training insurance, and/or life assurance and life assurance linked to an investment fund is the excess of the said expenses over BGN 60 per month per hired

person. The taxable amount for assessment of the tax on expenses on food vouchers is the excess of the said expenses over BGN 40 per month per hired person.

 

VII.5. Withholding Tax Obligations

Subject to such a tax is only the income of resident  and non-resident legal entities whereas the income of natural persons is regulated by Income Taxes on Natural Persons Act. Corporate taxpayers are subject to the following

main withholding obligations:

VII.5.1. Repatriation of Profi t/Dividend Withholding Tax

Bulgarian resident corporations which distribute dividends have to withhold dividend withholding tax from dividend distributions in favor of: • non-resident legal persons, with the exception of the cases where the dividends accrue to a non-resident legal person through a permanent establishment in the country;

• resident legal persons which are not merchants, including any municipalities. No withholding tax is levied if the   ividends are distributed in favor of resident legal person who participates in the capital of the company as a   representative of the State or common fund. Dividends charged by a resident subsidiary in favor of a parent company of a Member State shall not be subject to levy of a withholding tax. Dividends charged by resident legal persons in

favor of a permanent establishment in another Member State shall not be subject to levy of a withholding tax where the following conditions are simultaneously fulfi lled:

• a tax under Annex 2 of the CITA (a list of the taxes in different member-states) or a similar profi ts tax is levied on the  profi ts from a permanent establishment and the permanent establishment has no option or the possibility of being exempt from the levy of such tax;

 • the permanent establishment is of another resident person or of a company of another Member State;

• the resident person/company referred to in Item 2 has, inter alia through the permanent establishment, a minimum holding of 15 per cent in the capital of the resident person distributing the dividends for an uninterrupted period of at least two years;

• the resident persons referred to in Items 2 and 3 are commercial corporations or unincorporated associations and the  profi ts thereof attract corporation tax. The taxable amount for assessment of the tax withheld at source on dividends is  the   gross amount of the dividends distributed.Since 1 January 2008 the tax rate of the withholding tax on dividends is decreased from 7% to 5%.

VII.5.2. Withholding Obligations with Respect to Payments to Non-residents

Certain items of business and investment income of non-resident legal entities earned from sources in Bulgaria are subject to fl at fi nal income tax, which is normally levied by means of withholding. The domestic rate of tax is 10%. Where the recipient of the payments resides in a country with which Bulgaria has a Double Tax Treaty, the tax rate could be reduced or an exemption could be available subject to the provisions of the respective treaty. The following income of nonresident legal enmities is subject to withholding tax:

• income from fi nancial assets issued by resident legal persons, the Bulgarian State and the municipalities;

• income from transactions with such fi nancial assets;

• the following income, charged by resident legal persons, resident sole traders or non-resident legal persons and sole

traders through a permanent established or a fi xed base in the country or paid by resident natural persons or by non-resident natural persons who have a fi xed base in the country:

- interest payments, including interest within payments under a fi nancial lease contract;

- income from rent or other provision for use of movable or immovable property;

- copyright and license royalties;

- technical assistance fees;

- payments received under franchising agreements and factoring contracts;

- compensations for management or control of a Bulgarian legal person.

• income from agriculture, forestry, hunting ground management and fi sheries withinthe territory of the country;

• income from immovable property or from transactions in immovable property, including an undivided interest or a limited right in rem to any immovable property situated in the country. The income pointed out above, shall be subject

to levy of a tax withheld at source where not accruing through a permanent establishment. The tax shall be withheld by the resident legal persons, the sole traders or the permanent establishments in the country which charge the

income to the non-resident legal persons, with the exception of the income referred to in Items 2 and 4 herein.

Where the payer of the income is not a taxable person under the CITA and in respect of the income referred to Items 2 and 4 herein, the tax shall be withheld from the recipient of the income. Income from disposition of shares in public

companies, negotiable rights attaching to shares in public companies, and shares in and units of collective investment schemes, shall not attract a tax withheld at source where  the said disposition is effected on a regulated

Bulgarian securities market.

VII.6. Treaties for Avoidance of Double Taxation (Double Tax Treaties)

Bulgaria has concluded more than sixty double tax treaties which provide for a relief of tax or a reduced rate of tax.

VII.6.1. Procedures for Claiming Relief Under a Double Tax Treaty

In order to benefi t from the reliefs in a double tax treaty a non-resident person must submit application in a standard form with the revenue authority proving that the said person:

• is a resident of the other State within the meaning given by the relevant treaty;

• is an owner of the income from a source inside the Republic of Bulgaria;

• does not own a permanent establishment or a fi xed base within the territory of the Republic of Bulgaria, whereto the income is effectively connected;

• fulfi lls the special requirements for application of the treaty or separate provisions thereof in respect of persons specifi ed in the treaty itself, where such special requirements are contained in the relevant treaty. Written evidence regarding the type, the grounds for realization and the amount of the relevant income should be attached to the claim. The revenue authorities exercise control as to the application of convention and conduct an examination or an audit. Where an examination is conducted, an opinion on the existence or non-existence of grounds for application of the tax convention shall be issued to the non-resident person within 60 days after submission of the request. Non-pronouncement

within this time limit is presumed as an opinion on existence of grounds for application of the double tax treaty.

The non-resident person is entitled to appeal the refusal of the revenue authorities to allow direct application of the tax treaty.

VII.7. Local Taxation

Local taxes are charged by the municipalities.According to the latest developments in the applicable law the Municipal Council determines the amount of the taxes within the range established by the law. Till the end of 2007 the

rates and amounts of local taxes were provided for by the law. The main local taxes are:

VII.7.1. Real Estate Tax

Taxable properties are built up land, non-built construction plots and buildings with tax valuation more than BGN 1,680. No tax shall be levied on agricultural land tracts and forests, with the exception of developed land in respect of the actually developed surface area and the adjoining ground. Taxable persons are the owners or holders of limited real rights over the taxable property.The Municipal Council determines the amount of the tax within a range of 1.5 to 3

per mille of the assessed value of the property. A reduction of 50% of the tax is allowed if the property is a main residence.

VII.7.2. Transfer Taxes

Tax shall be levied on any properties acquired by donation, as well as on any onerously acquired real estates, limited real rights thereto, and motor vehicles. The tax shall be paid by the transfee of the property of by the transferor in case the transfee is abroad. The tax rate is determined by the Municipal Council within 2 and 4 per cent of the assessed

value of the transferred property. Donation and disposal without consideration of any property are subject to tax at the

following rates:

• from 0.7 to 1.4 per cent: applicable to donations between siblings and the children of siblings;

• from 5 to 10 per cent: applicable to donations between any persons.Exemption from transfer taxes is provided for

privatization of assets, for in-kind contribution of assets to the share capital of a company as well as in some other cases provided in law.

VII.7.4. Final Annual (License) Tax

A signifi cant amendment in Bulgarian tax legislation is that this tax is charged by the municipalities as of 1 January 2008 and is not income to the central budget. The license tax is applicable to natural persons and sole traders only (not legal entities) and under the following conditions:

• performance of certain activities pointed out in the Income taxes on natural persons act;

• turnover of the person for the last preceding not exceeding BGN 50,000, and

• the person is not registered under the Value Added Tax Act, with the exception of registration for intra-Community acquisition.

VII.8. Capital Taxation. Ecological Levies

VII.8.1. Taxes on Capital

Except as mentioned above, no specifi c taxes are charged on the capital of the businessesor their net worth or on their assets. In particular, no capital duties or material stamp duties are payable on the incorporation of a Bulgarian company or on its capital or on subsequent contributions to the capital.

VII.9. Income Taxation of Individuals

VII.9.1. Taxable Persons

Taxable persons are resident and non-resident natural persons, who earn income from sources in Bulgaria and resident and non-resident persons, who are obligated to withhold and remit taxes. “Resident natural person,” whatever the

nationality, is any person:

• who has a permanent address in Bulgaria,or

• who is present within the territory of Bulgaria for a period exceeding 183 days in any twelve-month period, or

• who is sent abroad by the Bulgarian State, by bodies and/or organizations thereof, by Bulgarian enterprises, and

the members of the family of any such person, or

• whose centre of vital interests is situated in Bulgaria. Any person, who has a permanent address in Bulgaria but whose centre of vital interests is not situated in the country, is not a resident natural person. Where a Double Tax Treaty

applies, the residency status could be impacted by the provisions of the Treaty.  Resident natural persons are liable to taxes in respect of any income acquired thereby from sources inside and outside the Republic of Bulgaria while non-resident natural persons are liable to taxes in respect of any income acquired thereby from sources inside the

Republic of Bulgaria. Bulgarian law contains detailed rules on when an activity or investment is suffi ciently

related to Bulgaria to give rise to Bulgarian taxation.

48

VII.9.2. Taxable Income

The annual taxable income is defi ned as an aggregate of the total income received by the individual during the calendar year with the exception of the income which is non-taxable by virtue of a law and the income specifi cally excluded from the annual income which is taxed separately under specifi c rules. The taxable income and the taxable amount shall be determined for each source of income separately under specifi c procedures, provided in the law. The aggregate annual taxabe amount is the sum total of the annual taxable amounts determined for each type of income, depending on the sources, net of the tax relieves provided for by law.The sum total of the annual taxable amounts is debited with:

• personal voluntary social insurance contributions made during the year to anaggregate amount not exceeding 10 per

cent of the sum total of the annual taxable amounts, as well as with any personal voluntary health insurance  contributions and premiums/payments paid during the year under contracts of life assurance to an aggregate amount not exceeding 10 per cent of the sum total of the annual taxable amounts;

• donations made during the year up to certain limits and under certain conditions etc.

VII.9.3. Tax Rate

A signifi cant amendment in income taxation of individuals is that the progressive tax rate which depended on the  mount of the annual taxable income and was within the range of 20 % to 24 % is replaced with a fl at rate of 10 % regardless of the amount of taxable income. Thus, in general the amount of tax on the aggregate annual taxable amount is etermined

by multiplying the aggregate annual taxable amount by a tax rate of 10 per cent. Certain items of income of residents or nonresidents are not included in the taxable annual income and are subject to special rules of taxation with respect to the rates and the basisfor tax. Some tax rates, applicable thereto, are decreased since 1 January 2008. Thus, dividends

are subject to tax of 5 % instead of 7 %;income from supplementary voluntary social insurance, from voluntary health insurance and life assurances and income acquired by the person upon the sale or exchange of movable

property under certain conditions is levied withtax of 10 % instead of 15 %

VII.9.4. Exemptions

Taxability does not apply to:

• income acquired during the tax year from the sale or exchange of:

(a) one residential immovable property, regardless of the date of acquisition of thesaid property;

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

• 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 fi nancial 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;

• interest paid on accounts and depositswith any domestic commercial bank,branch of a foreign bank and with domestic

mutual aid funds;

49

• interest paid and discounts made onBulgarian government, municipal and corporate bonds etc.

VII.9.6. Final Taxes

• Taxation of non-resident persons’ income. Certain items of income are not included in the annual taxable income but   re taxed separately with a fi nal tax. This treatment applies to the following items of income:

(a) compensations for lost  profi t and damages of such nature;

(b) scholarships for study in Bulgaria and abroad;

(c) interest payments, including interest within payments under a lease contract etc. The provisions determining the ncome which is not subject to tax do not apply to the items herein. However, no fi nal tax shall be levied on  such items  exempted from taxation under the mentioned provisions and charged/paid in favor of non-resident natural persons  established for tax purposes in a Member State of the European Union, as well as in another Member State of the European Economic Area. The tax rate is 10%.

• Income of resident and non-resident natural persons. Unlike the tax legislation prior to January 1st 2007 the income  deriving from dividends and from shares in liquidation surplus of resident and non-resident natural persons is not taxed

with withholding tax which had to be withheld by the legal entity, distributing the dividend/ share of liquidation surplus. Pursuant to the present Income taxes on natural persons act the income from dividends and from shares in any liquidation surplus in favor of resident or non-resident natural person, where accruing thereto from a source inside Bulgaria and residentnatural person, where accruing thereto from a source outside Bulgaria attract a final tax.

The tax rate is 5%.

• Under certain conditions a fi nal tax shall be levied on the gross amount of the taxable income from supplementary

voluntary social insurance, from voluntary  health insurance and life assurances. A fi nal tax shall be levied on the gross

amount of the income acquired by the person upon the sale or exchange of movable property. The tax rate is 10%.

VII.9.7. Businesses of Individuals/SoleTraders  A specifi cation in taxation with respect of sole traders is that the  tax basis of the registered sole traders is the taxable profi t in accordance with the tax rules applicable to corporations.

The latter applies to the income from economic activity of a natural person who is a merchant within the meaning given by the Commerce Act but is not registered as a sole trader. The taxable income referred to herein excludes the

accounting fi nancial result formed by activities:

 • on which alternative taxes are levied under the Corporate Income Tax Act ;

• on which a fi nal annual (license) tax is levied.

The annual taxable amount shall be determi- 50 ned by debiting the taxable income referred to herein for the tax year with the contributions for social and health insurance.

VII.9.8. Tax Returns and Payment of Taxes

Natural person should fi le an annual taxreturn. The obligation to submit an annual tax return does not apply to persons  who have received solely:

• income from employment relationships,

• non-taxable income;

• income on which a fi nal tax is leviable;

• income accruing to non-resident persons,

on which a fi nal tax has been levied.The return should be fi led before the 30th day of April of the year next succeeding the year of acquisition of the income. The tax should be remitted on or before the 30th day of April of the year next succeeding the year of acquisition of the income. Certain items of income are also subject to provisional tax payable through the year on monthly or quarterly basis If the annual tax return is submitted on or before the 10th day of February of the next succeeding year, a rate rebate of 5 per cent of the balance of tax due under the annual tax return where remitted on or before the same date is allowed. If the return is submitted on or before this date by electronic means, a  rate rebate of 5 per cent of the balance of tax due  under the annual tax return where remitted onor before the same date is provided.

VII.9.10. Double Taxation Treaties

As mentioned above Bulgaria has concluded more than 60 double tax conventions. They also provide rules regarding the natural    persons. If no such treaty exists with the respective country pursuant to the Income taxes on natural     

persons act resident natural persons are allowed foreign tax credit in respect of identical or similar foreign taxes levied  abroad by the respective competent authorities.

VII.10. Excise Duties

On November 15 2005 the existing Excise Duties Law has been abolished and substituted by a new excise law, which introduced the system of the tax warehouses. A tax  warehouse is the place where excise duty goods are produced, stored, entered or sent by traders under the term of delayed excise duty payment. Certain luxury products, as well as certain other goods listed in law are subject to excise duties. Excise duties are payable as one-time consumption tax on  the import of dutiable products in Bulgaria, or on the fi rst sale of locally  manufactured products in Bulgaria by their manufacturer.  The following main categories of products are subject to excise duties:

• liquors and beer, and raw materials with a content of alcohol; wine is zero-rated for excise duty purposes, but the    producers of wine may be subject to excise duty registration and control;

• tobacco products such as cigars, cigarettes,tobacco for consumption;

• certain automobiles (with maximum 9 seats) with an engine power exceeding120 Kw under the DIN system;

• energy products and electricity; As of 1 January 2008 coffee and extracts from coffee are not subject to excise duties.

Another amendment are the increased tax rates for some types of fuels, coal, electrical energy for business and administrative needs etc. Excise duties are normally charged as a fl at amount per measurement unit for the respective

product (BGN per piece/ton/liter, etc.). Exports are exempt from excise duties. Where

excise duties have been paid for products that are subsequently exported, a refund could be received.

51

Where excise duties are charged on row materials with a content of alcohol which have been used for production of dutiable liquors or non-dutiable food products or medicines, a refund could be claimed for the duties paid on

the row materials.

VII.11. VAT System

Pursuant to Bulgarian legislation the following transaction should be VAT taxable:

• each taxable supply of goods or serviceseffected for consideration;

• each intra-Community acquisition effected for consideration, whereof the place of transaction is within the territory of  the country, by a person registered under this Act or by a person in respect of which an obligation to register has arisen;

• each intra-Community acquisition of new means of transport effected for consideration, whereof the place of transaction is within the territory of the country;

• the importation of goods; Under Bulgarian legislation taxable person shall mean any person who independently carries   ut an economic activity, whatever the purpose and results of that activity. As of 19 December 2007 subject to obligations under the Value Added Tax Act are also persons who practice a liberal  profession, including as private bailiffs, lawyers and notaries. However, services, representing procedural representation whereby the right to defense of natural persons in preliminary, legal, administrative and arbitration proceedings is exercised, are exempt from VAT. Non-taxable persons should be these which are not a taxable within the meaning given above and which effects intra-Community acquisition of goods. The intra-Community acquisition of goods is defi ned in details in the Value Added Tax Act.

VII.11.1. Registration of Persons

Pursuant to VAT Act some of the persons which fall within the requirements of the law are obliged to register with the National Revenue Agency, which maintains VAT Persons Register. Upon registration each persons is

issued a unique ID number for VAT purpose having BG prefi x. The requirement for registration applies to each taxable person who is established within the territory of the country and who affects taxable supplies of goods or services. Also the person is required to register under the VAT Act it is a taxable person who is not established within the territory of the  country and who effects taxable supplies of goods or services covered under Article 12 other than those for which the tax is chargeable from the recipient. According to the VAT Act there are two types of registration – compulsory and optional.

• The compulsory registration applies to taxable person having a taxable turnover of BGN 50,000 or more for a period  not exceeding twelve consecutive months last proceeding the current month. These persons should fi le an application   for registration within 14 days after the lapse of the tax period during which such turnover has accrued. These  requirements should not apply to persons to whom the following conditions are simultaneously fulfi lled:

 - they supply services electronically to recipients who are non-taxable persons, who are established or have a permanent address or usually reside within the territory of the country;

- they are not established within the territory of the Community; - they are registered for VAT purposes for  their activity referred to in Item 1 in another Member State. In case of intra-Community Acquisition the taxable and non-taxable persons which do not cover the presented above conditions are required to register, are required to register if

they conduct intra-Community acquisitions. This requirement should not apply to persons which sum of the acquisitions does not exceed 52 20 000 BGN for the current calendar year. Notwithstanding the taxable turnover, the registration requirement under the VAT Act shall apply to each person who is established in another Member State, who is not  established within the territory of the country and who affects taxable supplies of goods which

are assembled or installed within the territory of the country by or for the account of the said person.

Obligation for registration occurs also for a person who performs distance supplies – supplies whereof the place of  ransaction is within the territory of the country, the recipient of the supply is not registered for VAT purposes in

the country and the supplies effected under the terms of distance selling for the territory  of the country exceed the amount of BGN 70,000 for the current calendar year or have exceeded the said amount for the last preceding

calendar year

 • The optional registration under the VAT Act provides the persons which satisfy a certain requirement the right to  register (but not the obligation) and to benefi t from the regime of the VAT system. Pursuant to Article 100, para. 1 any

person which do not cover the condition for compulsory registration may register under the VAT Act.   Any taxable and non-taxable legal person, which does not cover the compulsory registration conditions, has the right to register under

the VAT Act for intra-Community acquisition. Also any taxable person may register provided that the said person has notifi ed the tax administration of the Member State where the said person is registered for VAT purposes that the said person wishes the distance selling effected thereby to have a place of transaction within the territory of the country. The optional registration is administered by the National Revenue Agency where the persons may fi le an application.

An amendment in the applicable law, effective since 19 December 2007, aiming to reduce the participation of companies  with pending obligations in the VAT system is the right of the revenue authorities to require security in cash,

in government securities or in unconditional and irrevocable bank guarantee for a term of one year in order to register a  person on which data exist that one or more of its owners, managing directors, procurators, majority

partners or shareholders are or have been, at the time of occurrence of the liabilities, owners, procurators, majority partners or shareholders, members of managing or controlling bodies of persons with unsettled value added tax liabilities

exceeding BGN 5,000, or have unsettled value added tax liabilities exceeding BGN 5,000 in the capacity as natural  persons or are persons against whom penal proceedings have been initiated or have been convicted for offenses against the tax system

• In some cases the tax authorities may initiate a registration procedure for a person who has fallen within the   requirements for compulsory registration. In this case the tax authority would issue an ordinance stating the grounds and  the date on which the obligation to register has arisen.

VII.11.2. Tax Rates

The rate of tax is 20% and is applicable to:

• the taxable supplies, except for those  xpressly specifi ed as subject to the zero rate;

• the importation of goods into the territory of the country;

• the taxable intra-Community acquisitions. The rate of tax applicable to accommodation provided by a hotelier, where part of a package tour, is 7%.

VII.11.3. VAT Exemptions

The following major transactions are entitled to zero rate of VAT:

• supplies of goods dispatched or transported to destination outside territory of the European Community;

53

• certain transactions related to international transportation;

• supply for handling of goods;

• supply related to duty-free trade;

• supply of goods provided by agents, brokers and other intermediaries. Since 19 December 2007 the Value Added

Tax Act regulates the forwarding services andtreats them as equivalent to transport services. Main transactions which  re exempt from VAT are:

• supply linked to health care;

• supply linked to welfare and social security

work;

• the transfer of the right of ownership of land, the creation or transfer of limited rights in rem to land, as well as the  letting or leasing of land Transactions with buildings or parts thereof, which are not new, with building land, as well as the creation and transfer of other rights in rem thereto, are an exempt supply. The letting of a building or part thereof for residential use to a natural person who is not a merchant shall likewise be an exempt supply. However

the transfer of a right of ownership of a regulated lot within the meaning given  by the Spatial Development Act, with the

exception of the building land of buildings which are not new is not exempt from VAT.

VII.11.4. Intra-community Supply of Goods

The new VAT Act provides the intra-community supply of goods which actually replaces the regulation of export under the previous VAT Act as far as transaction between merchants from different member states is concerned.

Intra-community supply of goods is any supply of goods, transported from the territory of the country to the territory of  another Member State, where both supplier and recipient are registered for VAT. Intra-Community acquisition

is acquisition of the right of ownership of goods, as well as the actual receipt of goods, which are dispatched or   transported to the territory of the country from the territory of  another Member State, where the supplier is a taxable  person registered for VAT purposes in another Member State. Intra-community supplies with the exception of the  exempt intra-community supplies referred are liable to tax at the zero rate. Regarding intra-community acquisition, the

recipient charges 20% VAT and is entitled to deduct credit for input tax.

 VII.11.5. VAT Documents, Reporting and

Payment

Tax documents are:

• the invoice;

• the advice to an invoice;

• the memorandum.

1. Invoice. Each taxable person who is a supplier is obligated to issue an invoice for a supply of goods or service  affected thereby or upon receipt of an advance payment before affecting such a supply except in the cases

where the supply is documented by a memorandum. The invoice to contain some compulsory requisites. The invoice shall mandatory be issued not later than fi ve days after the date of occurrence of the chargeable event for the

supply, and in the cases of advance payment,not later than fi ve days after the date of receipt of the payment. However, upon an intra- Community supply, including in the cases of advance payment, the invoice shall mandatorybe issued not later that the 15th day of themonth following the month during which the chargeable event occurred

2. Advice to an invoice. It is issued if the taxable amount has changed or where other circumstances have occurred which result in change of the due tax and an invoice has already been issued.

3. Memorandum. It is a new tax document, issued where the VAT is due by the recipient. As of 19 December 2007 the memorandum  shall be issued not later than 15 days after the date on which the tax became chargeable instead of 5 days as it was provided for  before the amendment of the law. VAT is generally reported and paid monthly. The monthly VAT returns are to be fi led and monthly VAT payments by the 14-th day of the following month. The tax under this Act shall become chargeable in respect of the taxable supplies and an obligation for the registered person to charge

the said tax shall arise on the date when the supply of goods or services is affected. The tax upon an intra-Community acquisition shall become chargeable on the 15th day of the month following the month during which the

supply of goods or services is affected. Any registered person, in respect of whom the tax has become chargeable, shall be obliged to charge the said tax and, to this end, must  issue a tax document and indicate the tax on aseparate line therein

VII.11.6. VAT Refunds

Where VAT incurred on purchases exceeds VAT charged on sales, the excess VAT deduction is fi rst carried forward for a period of three months to offset VAT debt due in these three months. If at the end of the three-month period

the excess VAT or part thereof has not been recovered, the balance is refunded within 45 days after the date of fi ling of the VAT return for the third month (i.e., within approximately fi ve months after the excess VAT has been  incurred), except where the tax person has declared in written to deduct the excess VAT from the input VAT on purchases incurred   in the next 9 months. The period for refund could be extended by the tax authorities if they commence 

a tax audit, but generally by not more than three months.

VII.11.7. Special Rules for Material Investment Projects

VAT-registered investors who perform certain eligible investment projects are entitled to import assets needed for the project without effective payment of import VAT. In addition, such investors are entitled to refund VAT

incurred on local purchases within 30 days after fi ling of the tax return. In order to benefi t from the special investment rules, the investor needs to obtain an advance approval from the Minister of Finance. In order to receive the

approval, the investment project must meet certain conditions, such as:

• the time limit for implementation of the  project does not exceed two years;

• the amount of investment exceeds BGN 10 million for a period not longer than two years;

• more than 50 new jobs are created;

• the person is capable of fi nancing the project, as well as of constructing and maintaining facilities ensuring the  mplementation of the said project.

VII.11.8. Special VAT Regulations for Tourist Sector

There are two regimes in the new VAT Act regarding the tourist sector depending on the  services provided. The rate of tax applicable to accommodation provided by a hotelier to foreign tour operators for organized group of foreign tourists (which is called “basic tourist service”), where part of a package tour, shall be 7% The provision by a tour operator or a

travel agent, acting in his own name, of goods or services in connection with the journey of a tourist for the direct benefi t of the tourist, is treated as a supply of a single service to tourists. The goods and services directly benefi -

ting the tourist shall be the goods and services which the tour operator or the travel agent has received from other taxable persons and has provided to the tourist without alteration. If the place of transaction of a single service to

tourists is in Bulgaria, the tax rate is 20%. However, if the supplies of goods and services for the direct benefi t of the tourist have a place of transaction within the territory of third countries and territories (i.e. outside the territory if the Community ) they are taxed at zero rate.