Taxation of foreign income of legal entities

The main group of taxable persons are local legal entities and foreign legal entities by place of business within the country. Therein are also included sole proprietors in respect of taxes withheld at source on expenses, as well as in cases where they are subject to an alternative tax.

For the purposes of taxation under Bulgarian law the key term is "local legal entity". Art. 3 of CITA states that "local" are:

• legal entities established under Bulgarian legislation (for the purposes of tax law, unincorporated associations and insurance funds under CSR are treated as legal entities, as well as NGOs – for profit realized within the country);
• companies established under Regulation (EC) No. 2157/2001 of the Council, and cooperative societies established under Regulation (EC) No. 1435/2003 of the Council where they have their registered office within the country and are entered in a Bulgarian register

Local legal entities are taxed on their profit and income from all sources within Bulgaria and abroad. In terms of realized profits and taxes paid abroad, the provisions apply of the relevant treaties for the avoidance of double taxation (Double Taxation Treaties or DTT) apply or to recognize the right of deduction under CITA.

When the Bulgarian company has realized passive profit from a source abroad (dividends, interest, royalties, etc.), this should be entered in its accounting records as the gross amount of income, such that the amount in foreign currency is subject to the exchange rate at the date of the transaction.

In some cases it is possible for the country abroad to withhold tax at the source (thereby applying the territorial principle of taxation). If the tax has been paid abroad, the tax withheld at the source is recognized as an expense in the accounts of the local Bulgarian entity. For the avoidance of double taxation, Art. 13 of CITA provides that the provisions of the respective ratified international treaty take precedence over the Bulgarian legislation. If such have not been concluded, local entities are entitled to a "tax credit" under CITA - the right to deduct the tax on profit and income already paid abroad as set out in the law. This right arises only in relation to identical taxation in both countries, but the law does not establish criteria as to what taxes are considered identical. This ambiguity is resolved in terms of income from interest, dividends, royalties and license fees for technical services and rent, which specifically provide for using the tax credit. The amount of the tax credit is limited to the amount of Bulgarian tax that may be chargeable if the profits or income have been acquired in the country.