Up to 1988 the legal framework of taxation was formed by numerous legislative and government acts - the Constitution of the People's Republic of Bulgaria, tax laws, acts of the Council of Ministers. In practice, however, it was also subject to continual modifications and specifications by various regulations, instructions, etc., on an administrative level. Until the end of 1988 the legal persons liable by law to pay taxes were the state-owned and municipal economic organizations and the cooperatives. Taxing of public organizations was limited, as few of them were engaged in economic activity.

The period of extremely centralized state regulation of the national economy was characterized by the use of the so-called "two-channel tax system" - turnover tax and contributions to the state budget. After the establishment of a new management system in 1965 there followed the introduction of other tax payments, with the fiscal aspect being of secondary importance, while the chief purpose was to use them as "economic levers" in orienting the activity of the enterprises towards a specific goal. Each new model of the economic mechanism changed the name, content, size and organization of these tax payments. Tax legislation was thus marked by legislative instability.

The incomes of individuals carrying out some sort of economic activity were charged according to the Income Tax Law.

As of January 1, 1989 and the introduction of the so-called "company organization", along with the major taxpayers - the state-owned and municipal companies, there appeared new entities - private companies, branches of foreign persons licensed to carry out economic activity on the territory of Bulgaria, as well as joint ventures.

The adoption of Decree N 56 on Economic Activity and the provisions for commercial companies marked a new beginning for the system of commercial entity taxation.

The conditions and organization of accounting in private one-man and collective companies, as well as the taxation of the personal incomes of their members and employees were provided for by Ordinance N 3 on the Organization of Accountancy in the One-Man and Collective Companies of Citizens, issued by the Ministry of the Economy and Planning and the Central Statistical Direction (State Gazette 50/1989).

Private partnerships organized their accounting in the manner established for legal person companies.

Despite the principle proclaimed by art. 4, par. 1 of Decree N 56 that all companies are granted equal business conditions, in practice private companies were placed on an unequal footing in terms of taxation, moreover, at the very beginning of their economic activity.

Thus, for instance, instead of removing taxation on that part of the private company's earnings which is spent on the acquisition of built-up real estate for industrial purposes, the practice remained of charging the entire income. Typically, the chief source for purchases of real estate, constituting a fixed asset of every company, used to be the provisions for depreciation. However, that placed the newly created private companies on an unequal footing since only state-owned companies had acquired fixed assets up to then (for instance, real property - land and buildings), moreover, mostly granted to them free-of-charge by the state. On that basis state-owned companies were entitled to provide for depreciation on the total fixed asset value and use that free of tax allowance to buy new fixed assets, etc.

The newly created private companies had no fixed assets and consequently no basis to make deductions for depreciation. This led to absurd situations when a private company wished to buy real property from the income received in the end of the year and was required to pay profits tax even on the money spent for the purchase, since the state taxed the entire earnings.

Another serious problem for the development of private companies was the fixed depreciation rate of 1 per cent, determined in accordance with the Ordinance N 3 on the Organization of Accountancy in the One-Man and Collective Companies of Citizens. All allocations above that percentage were taxed, which posed another obstacle to the normal development of the business, more specifically accelerated depreciation and renovation.

According to Art. 64 and 78 of the then acting Constitution, taxation was determined by law, and not by government acts and regulations. However, Ordinance N 3 required one-man and collective companies to pay the due tax monthly, while according to art. 33, par. 1 of the Income Tax Law (in its version at the time), the tax was paid annually.

Furthermore, the newly formed companies were granted no preferential treatment - for instance, reduced taxation or tax exemption in the first few years of their existence.

All of these tax regulations placed private business in a disadvantageous position, and on the other hand prompted it to seek ways of sidestepping the law and tax evasion.

Since the adoption of the Constitution of the Republic of Bulgaria in 1991, taxation has been based on the provision of art. 60 of the Constitution, according to which citizens are liable to pay taxes and duties fixed by law according to their incomes and property, with tax concessions and discriminatory taxes being established only by law. The National Assembly determines taxation and the amount of payable taxes according to Art. 84, Paragraph 3 of the Constitution. The process of building up a tax system in a position to meet the needs of the transition to market economy is currently under way.

Presently our tax system includes the following types of taxes, almost all of which apply to the economic activity of the private sector as well.

Direct property taxes:

Built-up Real Estate Tax.
This tax has been regulated by Art. 5-21 of the Law on Local Taxes and Tariffs. Sole traders and private companies which own buildings are liable to pay the respective taxes.

Inheritance Tax.
It has been provided for by Art. 22-32 of the Law on Local Taxes and Tariffs.

The category of direct property taxes used to include the so-called rent tax, or land tax. It was regulated by art. 87, par. 1 of Decree N 56 and used to be charged only on legal persons engaged in economic activity and having been granted the use of farm land. Farming cooperatives, sole traders, and farmers were exempted from that tax. The rent tax has been abolished as of October 1, 1993, with the repeal of the respective provisions of Decree N 56.

Direct income taxes:

Income tax.
It is imposed by the Income Tax Law. The tax is charged on all personal incomes (from contracts of employment and contracts of services, rentals, dividends to shareholders of cooperatives or companies), the incomes of sole traders, and of non-profit organizations.

The persons liable to pay income tax are:

- all Bulgarian citizens, irrespective of domicile and place of residence;
- foreign citizens, with the tax being charged only on the incomes received in Bulgaria;
- sole traders- the tax is charged on the incomes received from their business activity;
- foundations and non-profit organizations.

The incomes charged under art. 13 of the Income Tax Law include incomes from private business activity, registered under the procedure prescribed by Decree N 35 of the Council of Ministers on the Adoption of Rules and Regulations on the Collective and Personal Labor of Citizens for Additional Production of Goods and Services; the income from the business activity of sole traders, with a mandatory requirement of keeping accounts in accordance with the Accountancy Law.

Profits tax.

This tax has been regulated by art. 87 of Decree N 56 on Economic Activity. It is charged on the annual profits as the difference between total revenues and the expenses under sections I, II, and III of the Income-Outcome Statement (addendum to art. 40, par. 1, sec. 2 of the Accountancy Law). The resulting net profits are subject to restructuring under art. 73, par. 5 of the Rules for the Implementation of Decree N 56 on Economic Activity.

The profits tax is charged at a rate of 40 per cent, the banks and persons specified under art. 1, par. 4 of the Bank and Credit Activities Act pay at a rate of 50 per cent, and the State Savings Bank at a rate of 70 per cent.

The following tax concessions are presently given to private legal persons under art. 87, par. 4 of Decree N 56:

- companies pay at a rate of 30 per cent if their taxable annual earnings do not exceed BLV 1 million.
- companies reduce their taxable earnings by the amount spent and/or payments on bank loans for the acquisition or creation of tangible or intangible fixed assets in the country. The tax reduction applies upon acquisition of the following assets: commercial and industrial buildings and land, provided that a licence has been obtained for the construction of such buildings; facilities, machinery, and equipment; means of transport (excluding automobiles) for cargo and passenger transportation and supply of services; productive and draught animals.

Up to 1991, the provision of art. 90, par. 2 of Decree N 56 allowed in the case of certain manufactures and activities specified by the Council of Ministers for payments on the principal and interests on investment loans to be made from the earnings prior to charging the profits tax.

On the other hand, under the existing regulations until 1991 - art. 90, par. 4 of Decree N 56, the Council of Ministers could grant full or partial tax exemption to certain activities or territories. Thus, for instance, up to 1991, manufactures and services in built-up areas with up to 1,000 inhabitants were exempted from profits tax. Where the population was between 1,000 and 5,000 people there was a 20% reduction of the charged profits tax for activities in the trade and services sectors, according to Decision N 138 of the Council of Ministers of May 31, 1991. Decree N 97 of the Council of Ministers of May 29, 1991 exempted from profits tax manufactures and activities in specific built-up areas along our southern and western borders. Decree N 130 of the Council of Ministers exempted from taxes companies in the border zones licensed to trade in foreign currency. According to par. 6 of the Transitional and Final Provisions of the Rules for the Implementation of the Law on the Ownership and Use of Farm Land, the legal persons who are agricultural producers of vegetable and animal products are exempted from profits tax.

Currently the concessions with respect to the payment of profits tax are established in art. 20, par. 2 of the Law on Political Parties, art. 15 of the Law on the Academic Autonomy of Higher Education Institutions, art. 6 of the Foreign Aid Agency Law, art. 12 of the Bulgarian Academy of Sciences Law, art. 26 of the Bank and Credit Activities Act.

A number of tax concessions used to be provided for foreign subsidiaries and companies with foreign participation, but have been abolished with the amendment to Decree N 56 of October 1, 1993.

One such provision, for example, was found in art. 107 of the Decree, according to which the profits of subsidiaries of foreign persons or companies with foreign participation above 49 per cent and above USD 100,000 or the equivalent in some other currency, were charged at a rate of 30%. The provisions were also abolished according to which profits from economic activity on the territory of the duty-free border zones were exempted from profits tax in the first five years, and were subsequently charged at a rate of 20 per cent. The provision of art. 112 of the Decree was equally abolished, according to which companies with foreign participation and the subsidiaries of foreign persons were exempted from profits tax for a term of five years following their registration, when their economic activity was in certain high-tech fields specified by the Council of Ministers, in agriculture, and the food-processing industry.

Tax on Pay-Roll Increase

This tax has been regulated by art. 87, par. 1 of Decree N 56. It is charged on the size of the pay-roll increase for each trimester of the current year and payable by companies with state or municipal participation over 50%.

Indirect taxes:

Turnover and Excise Tax
This tax was imposed by the Law on Turnover Tax and Excise Duties. It was charged on the sale of goods and services. Liable to pay this tax were companies, state-owned and municipal enterprises, sole traders and private persons producing or importing taxable goods and services.

With the introduction as of April 1, 1993 of the Value Added Tax Law, the Law on Turnover Tax and Excise Duties has been abolished.

Any commercial entity importing raw materials, materials, finished products, regardless of their designation - whether for sale in the domestic market or further processing - is liable to pay duty. The legal regulation is contained in the Customs Law, the Rules for the Implementation of the Customs Law and numerous government acts on the control, procedure of collecting, and the customs tariff. The frequent and numerous changes in the customs regulations is one of the reasons for the evasion or the delayed collection of payable duties.

Other contributions to the budget.

There are a number of provisions in Decree N 56 requiring companies and sole traders to make additional payments to the state, called contributions, such as:

- legal persons with state and municipal participation over 50% carrying out commercial activities as defined by art. 1 of the Law on Commerce make obligatory contributions to the municipalities amounting to 10% of their taxable profits, and to the Meliorations Fund amounting to 2%;
- employers make obligatory contributions to the Professional Training and Unemployment Fund to the amount of 7% of the accrued payroll, excluding benefits and bonuses;
- obligatory contribution to State Social Security to the amount of 35% of the accrued payroll;

In conclusion, it should be noted that the tax reform has not been carried out consistently since 1989.

At one point tax concessions did not apply to private legal persons, with the exception of foundations and cooperatives, but only concerned private persons.

On the other hand, the considerably delayed introduction of the value added tax and charging of the turnover and excise tax created a number of problems, both in terms of the prompt collection of payable taxes, and in impeding the activity of companies.

The requirement for taxation of citizens and commercial entities to be established by law has not as yet been fully met. The legal framework of taxation of commercial entities is still set by the repeatedly amended Decree N 56. There still exist a great many government regulations which in fact allows for constant tax modifications on the part of the executive power.

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