Time of establishment of the company
Bulgaria presented a balanced budget in 2006 for the first time since its transition to a market economy. Foreign investment has increased dramatically since 1998 and continue at a high rate today. On 1 January 2007, Bulgaria joined the European Union.
Bulgaria has been hit by the 2008 financial crisis, but to a lesser extent compared to other countries in Central and Eastern Europe. This is partly due to a stable and strong currency and a healthy, small banking sector, which is thus less likely to be affected by the crisis. Therefore, this country will be particularly suited to certain business projects.
Types of companies
There are several types of companies for foreign investors:
- Limited liability company (OOD)
The OOD company is the most frequently established structure by large and medium-sized enterprises. A OOD company can be formed by two or more people. The minimum share capital for a limited liability company (OOD) is only two leva (BGN), but it is worth contributing a little more capital of BGN 100. Memorandum of association, signed by the founders in Bulgarian. The founders are liable for the obligations of the company up to the amount of the capital contributed to the company.
- Single-member limited liability company (EOOD)
The EOOD is another type of limited liability company. It may be established by an instrument of incorporation. The founder is responsible for the obligations of the company through the payment of capital. Similar to the OOD, the minimum capital is also BGN 2. The EOOD is a capital company whose capital is not divided into shares and liabilities towards lenders cannot be covered by the personal property of the sole owner of the capital.
- Joint-stock Company (AD- Akcjonerno drużestwo)
A joint-stock company may be established by two or more people. It is also possible to establish a single-member joint-stock company. In the case of a joint-stock company, the minimum value of capital is BGN 50 000, the minimum value of an AD (or EAD – in single-member) share is BGN 1. Before registering a company, it is necessary to pay min. 25 per cent capital. It is also obligatory to establish a reserve fund in the amount of at least 10% of the capital. The company settles its liabilities with the properties it owns. Owners of shares are liable for obligations undertaken by the company up to the amount of their shares and are not liable with their personal property.
- Branch / representative office
A branch of a foreign company on the territory of Bulgaria can be registered by any foreign person registered to conduct business activity according to the legal regulations of their country. According to Bulgarian law, the branch has no legal personality, but it has its seat and management address, manager, separated property, as well as passive legitimacy. Capital is not required to establish a branch.
Foreign entities which have the right to conduct business activity according to the provisions of domestic law (the law of the country of registration) may establish a representative office in Bulgaria. However, representative offices are not legal persons and cannot conduct business activity, but only advertising activity. A representative office is not an income tax payer.
Company registration procedure
The registration procedure is limited to the following steps:
- Checking in the Commercial Register if the selected company name is available and potential reservation of it,
- Depending on who is the shareholder of the company – natural person, legal person or local trustee – preparation of appropriate powers of attorney;
- Preparation of the articles of association and the company’s statute;
- Appointment of the Management Board;
- Submit the above-mentioned documents together with the application for registration in the Commercial Register;
- Payment of the capital to a bank account and obtaining confirmation of payment, or a payment of the capital to the cash register of the company;
There are no restrictions on the number of shareholders, however, a minimum of one shareholder is required to establish a company. Foreign shareholders are allowed. It is possible to choose a nominated service, in which case a professional trustee (local attorney) becomes the shareholder.
The board of directors is held by the general meeting of shareholders and appointed directors. The directors represent the company externally. The board of directors may be single-member. It is possible to choose the service of the nominee, in which case a professional trustee (local attorney) becomes the director.
The company must have a registration address, which we organise during the company registration process. You can choose from a variety of serivices – scanning mail, having a local telephone number or handling parcels with goods (warehouse service).
The time to set up a company together with the bank account is 3 weeks.
Minimum capital is 2 BGN and is paid in full during the establishment of the company. The capital is divided into shares. The size of the partners’ shares determines their rights and obligations towards the company. Capital can also be contributed in kind. In this case, it is subject to mandatory approval by 3 independent experts appointed by the Commercial Register.
Taxes and finances
Bulgaria has become even more attractive to investors as it has one of the most favourable tax systems in Europe. Corporate income tax there is 10%.
Tax residence of the company:
An enterprise is resident if it is registered in Bulgaria or has its registered office there and it is to be registered there at a later date. Residents pay tax on income from both domestic and non-resident activities. Non-residents pay tax only on income earned in Bulgaria.
10% Normal operating expenses may be deducted. For accounting purposes, depreciation may be calculated on a straight-line, progressive or degressive basis. Entrepreneurs may determine the depreciation schedule on the basis of the method chosen by them. For tax purposes, only the straight-line method is allowed. Starts can be deducted from income for the next 5 years. Retrospective deduction is not permitted. Capital profits are taxed in the same way as income (10%).
In EU law, the free movement of capital is the norm. In addition, Bulgaria has concluded a favourable double taxation treaty with Poland, which allows the application of the exemption method with progression for the remuneration of directors of a Bulgarian company who are Polish residents.
Counteracting tax avoidance
Bulgaria has implemented a transfer pricing system and the regulation in a great manner follows the OECD guidelines. There are no specific documentation requirements, but the tax office has the right to require documentation at the time of the audit. In the case of transactions with non-residents, it is for Bulgaria to demonstrate full compliance with the arm’s length principle. The thin capitalisation rules apply in both domestic and cross-border situations where a company’s liabilities exceed three times its equity capital. In this case, the interest costs incurred cannot be fully deducted. The general anti-abuse rules apply to hidden profit distributions related to interest expenditure and shareholder costs. A withholding tax of 5% and a fine of 20% of hidden distributions shall apply.
Tax year is a calendar year. The deadline for filing tax returns is 31 March. Tax is paid in advance in monthly or quarterly installments. It is not allowed to file consolidated statements. The statute of limitations for tax liabilities is 5 years and is calculated from the beginning of the year following the year in which they arose. This period may be extended to a maximum of 10 years. Companies are required to keep accounting records and prepare annual financial statements. Depending on the company’s turnover, local law requires an audit of the company’s books.
- Dividends – Dividends paid to non-residents are subject to 5% tax. However, if they are received by a resident of an EU or EEA member state, they are not subject to taxation.
- Interest; Royalties; Consultancy services paid to non-residents – 10% rate unless tax agreements or EU regulations reduce it. Residents may apply for a partial refund of the tax paid.
The standard rate is 20%. The reduced rate of 9% includes specified hotel services (from 1 April 2011). The 0% rate applies to exports and specific supplies of goods. The following services are excluded from VAT: financial services, education, insurance, health, lease of buildings for residential purposes and sale of old buildings. The obligation to register rests with companies whose 12-month turnover exceeds BGN 50000. An entrepreneur may also register voluntarily. Declarations are submitted monthly, by the 14th day of the following month.
- Property tax – the rate ranges from 0.01% to 0.45% of the higher gross book value or tax value of the property. The rate is determined annually by a given administrative district.
- Real estate transfer tax is levied on the sale or exchange of real estate or vehicle. The rate ranges from 0.1% to 3%.
- Customs duty is levied on products originating outside the EU. Excise duty is levied on tobacco, alcohol and fuel.
- 2% – tax on insurance premiums. There are exceptions to this tax.
Local labor law
Bulgaria is one of the few countries in which the services of the nominee are popular. Combined with the possibility of opening a bank account remotely and a low CIT and PIT rate (10%) – it is formally one of the most attractive countries in terms of taxes in the EU.
This is confirmed by the number of applications for company registrations – they reach hundreds of thousands (sic!). Please note that Poland and Bulgaria also apply the exemption with progression method for directors’ remuneration.
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