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Income Taxes on Natural Persons Act in Bulgaria

The Income Taxes on Natural Persons Act (ITNPA) in Bulgaria regulates the taxation of income of both local and foreign natural persons, including income originating from their business activity. With regard to the income of sole proprietors in Bulgaria, the ITNPA refers to the taxation regime under the Corporate Income Tax Act. Income received from patent activity is taxed in accordance with the Local Taxes and Fees Act.

The ITNPA entered into force on 01.01.2007, and on 01.01.2008 it introduced drastic changes to legislation –progressive tax was replaced by a flat tax system. As a general principle, taxable income is the whole income of the natural person, including that which originates from a source abroad (principle of worldwide income taxation), whereas foreign persons only owe tax on income originating from a source in Bulgaria (territorial principle). Citizenship is not a factor when differentiating between the local and foreign persons. Pursuant to Art. 4, regardless of their citizenship, a local natural person is a person:

  1. whose permanent place of residence is in Bulgaria, or
  2. who spends inside the territory of Bulgaria more than 183 days in each period of 12 consecutive months, or
  3. who resides abroad on assignment of the Bulgarian State, its authorities and/or its organizations, or Bulgarian establishments, and the members of their family shall also be local natural persons, or
  4. who has their centre of vital interests in Bulgaria. The centre of vital interests is in Bulgaria when the interests of the person are closely related to the country. In the course of determining those interests, different factors may be taken into consideration - family, property, the place in which the person carries out their employment, professional or business activity, etc. The person is regarded as a local one for the year during which his stay exceeds 183 days. The period of stay in Bulgaria for the sole purpose of receiving education or medical treatment is not regarded as a period of stay in Bulgaria.

A person who is permanently residing in the country, but his centre of vital interests is not located in the country, is not a local natural person.

Foreign natural persons are those persons who are not deemed as local. International agreements for the avoidance of double taxation may contain other criteria for differentiating between local and foreign natural persons and therefore they take precedence over the ITNPA, according to Art. 4 (5) of the Constitution of the Republic of Bulgaria.

Object of taxation is income originating from labour and non-labour relationships of natural persons, income from rent, management of real estate or the transfer of rights. The tax is annual.

 

Annual basis of taxation of income originating from labour relationships

The taxable income originating from labour relationships is the labour remuneration and all other payments in cash and/or in kind made by the employer or at the expense of the employer. Exceptions are listed in Art. 24 (2) ITNPA and include compensations, the value of special work clothes, food vouchers, and others.

The annual basis of taxation of income originating from labour relationships is determined as follows: the taxable income referred to in Art. 24 ITNPA received by the taxable person during the year of taxation is reduced by the mandatory insurance contributions withheld by the employer at the expense of the natural person, in accordance with the Social Insurance Code and the Health Insurance Act, as well as by the mandatory insurance contributions, deposited abroad, which are at the expense of the natural person.

 

Annual basis of taxation of income originating from other business activities

Natural persons who are not traders within the meaning of the Commerce Act are taxable under the ITNPA, thus part of the income received is reduced by the operating expenses recognised by statute.

The annual basis of taxation is determined as follows: the taxable income referred to in Art. 29 ITNPA that was received during the year of taxation is decreased by the amount of those contributions due by the self-insured person during the year at their own expense, and if the person is not a self-insured person, the taxable income is decreased by those mandatory insurance contributions which were made at their expense in accordance with the procedure set forth in the Social Insurance Code and the Health Insurance Act, as well as by the mandatory insurance contributions deposited abroad, which are at the expense of the natural person.

 

Annual basis of taxation of income originating from rent or any other granting of the use of rights or property

The taxable income originating from rent or any other granting of the use of movable or immovable property for consideration shall be determined by way of decreasing the income received by the expenses amounting to 10 percent.

According to Art. 32 ITNPA, the annual basis of taxation for local natural persons’ income originating from rent or any other granting of the use of rights or property is determined by way of decreasing the taxable income referred to in Art. 31 ITNPA, the said income being received during the year of taxation, by those contributions which the person was obligated to make during the year of taxation at their own expense in accordance with the procedure set forth in Art. 40, Para 5 of the Health Insurance Act.

 

Annual basis of taxation of income originating from the transfer of rights or property

The taxable income is regulated under Art. 33 ITNPA.According to Art. 34, the annual basis of taxation of income originating from the transfer of rights or property is the taxable income referred to in Art. 33 that was received during the year.

 

The annual basis of taxation of income originating from other sources

The taxable income is regulated under Art. 35 ITNPA and is the gross amount of the taxable income acquired during the year of taxation from:

  1. compensation for loss of profit and indemnities of that nature;
  2. pecuniary and non-pecuniary awards in games and competitions, these awards not being provided by an employer or an assignor;
  3. interest, including the interest contained in lease instalments, except the interest referred to in Art. 38 (13) ITNPA;
  4. production dividends from cooperative societies;
  5. the exercise of intellectual property rights as a legal successor;
  6. any other sources that have not been explicitly specified in the Act and are not subject to final taxes under this Act or to final taxes under the procedure set forth in the Corporate Income Tax Act.

The annual basis of taxation of the income originating from other sources is determined by decreasing the taxable income referred to in Art. 35 ITNPA received during the year of taxation by the contributions due by the person at their own expense during the year of taxation in accordance with the procedure set forth in Art. 40 (5) of the Health Insurance Act.

 

Total annual basis of taxation

According to Art. 17 ITNPA, the total annual basis of taxation is the aggregate of the annual bases of taxation as per Art. 25, 30, 32, 34 and 36, decreased by the tax relief provided for in the Act.

 

Tax reliefs

Tax reliefs are regulated in Art. 17 in connection with Art. 23 ITNPA.

According to Art. 17 and Art. 18 ITNPA, due to the lack of minimum non-taxable amount, the aggregate of the annual bases of taxation for persons whose working capacity is reduced by 50% or more is decreased by BGN 7 920; the basis of taxation for income originating from labour relationships for persons with reduced working capacity is also applicable to the month in which the reduced capacity occurred and the month in which the term of validity of the decision thereon expires.