Taxation of the income of narural persons. Flat tax

This article examines the main provisions related to the "flat tax" in the Republic of Bulgaria.

The introduction of the flat tax offers the following advantages:

reducing the tax burden on the rich, which should lead to an increase in consumption, savings and investment, and hence stimulate economic growth;
increasing tax collection due to the onerous and simplified procedure for its implementation;
combating the grey economy, because evasion of tax and insurance contributions could become more expensive than their due payment;
attracting the interest of foreign investors due to the low size of the tax.

The disadvantages are that people with lower income would be relatively more heavily burdened than those with higher income, as well as the certain budget risk that could potentially come about.

According to Art. 16 of the Income Taxes on Natural Persons Act (ITNPA), the taxable income and the basis of taxation are determined separately for each source of income, in observance of the provisions of the Act. In determining the taxable income, the following income is not included: the income subject to a final tax under the Act and the income subject to a final tax under the Corporate Income Tax Act, as well as income, subject to taxation by patent tax pursuant to the Local Taxes and Fees Act.

According to Art. 14 ITNPA, the income referred to in Chapter Five received during the year of taxation is subject to a tax on the total annual basis of taxation – income originating from labour relationships received during the year of taxation which will later on be discussed in this article. Income from business activities as a sole proprietor and that of registered agricultural and tobacco producers are taxable on the total annual basis of taxation as per Art. 28.

The income in Chapter Six of ITNPA is subject to a final tax.

Natural persons, including sole proprietors, are subject to a patent tax for income originating from patent activities under the Local Taxes and Fees Act.

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.

According to Art. 25 ITNPA, 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.

The annual basis of taxation of self-employed persons having received income under employment contracts as per § 1, item 26, letter "i", of the Supplementary provisions of the ITNPA, is reduced also by the insurance contributions, which the self-employed person is obliged to make in the year of taxation at their expense pursuant to the provisions of the Code of Social Insurance and the Health Insurance Act.

The annual basis of taxation of the income, received by a marine person, is 10 per cent of the annual basis of taxation determined under Art. 25 (1) ITNPA.

Annual basis of taxation for income originating from other business activities

Natural persons, who are not traders within the meaning of the Commerce Act, can reduce their taxable income originating from business activities, according to Art. 29 as follows:

by 60 per cent for income from the activity of natural persons, registered as agricultural producers, for the production of non-processed agricultural products, except for the income from production of decorative plants;
by 40 per cent for:

income originating from the activity of natural persons for production of processed or unprocessed agricultural products (including from sale of manufactured decorative vegetation), from forestry industry (including from picking medicinal herbs, mushrooms and fruits), from game husbandry and fisheries;
author’s and licence remuneration, including the income originating from the sale of inventions, works of science, culture and art, providing that the said sale has been carried out by the authors thereof, as well as income originating from the performance of actors-performers;
income originating from craftsmanship which is subject to a patent tax pursuant to the Local Taxes and Fees Act;

by 25 per cent for the income originating from working as a freelance practitioner and for the income originating from non-labour legal relationships.

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 determined under Art. 33 ITNPA. Paragraph 6 therein has been supplemented.

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

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 income received during the year of taxation from:

compensation for loss of profit and indemnities of that nature;
pecuniary and non-pecuniary awards in games and competitions, these awards not being provided by an employer or an assignor;
interest, including the interest contained in lease instalments, except the interest referred to in Art. 38 (13) ITNPA;
production dividends from cooperative societies;
the exercise of intellectual property rights as a legal successor;
any other sources that have not been explicitly specified in this 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.

According to Art. 36 ITNPA, the annual basis of taxation of 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 his/her own expense during the year of taxation in accordance with the procedure set forth in Art. 40, Para 5 of the Health Insurance Act.

Total annual basis of taxation

Thus 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 ITNPA.

Tax reliefs

The Act provides for the following tax reliefs:

Tax relief for persons with reduced working capacity (Art. 18 ITNPA).
Tax relief for personal contributions for voluntary insurance (Art. 19 ITNPA).
Tax relief for personal contributions for insurance length of service has been preserved (Art. 20).
A sequence was introduced for the application of tax reliefs (Art. 21).
Tax relief for donations;
22а introduced a tax relief for young families.
Tax relief for children;
Tax relief for children with disabilities.

Calculation of the tax amount

According to Art. 48 ITNPA the tax amount on the total annual basis of taxation is determined by multiplying the total annual basis of taxation under Art. 17 ITNPA by a rate of 10 per cent.

The tax calculated is reduced by the tax amount that has been withheld and/or paid in advance in the course of the year of taxation.