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.
Top
of page
|