Bulgaria acceded to the European Union (EU) on 1 January 2007 and as a member state of this intergovernmental organisation, it adopted a number of laws, which seek to harmonise intra-EU community trade. As such, VAT in Bulgaria is governed by the Value Added Tax Act (VATA) and Directive 2006/112. But what exactly is VAT in the context of Bulgaria and Bulgarian trade and what are the important considerations you need to bear in mind as a foreign business owner in the country? Let’s take a closer look.
What is VAT?
Wondering what is VAT tax? VAT – an abbreviation for Value Added Tax – is an indirect tax that is levied on goods and services in Bulgaria and other states. The tax rate is determined by law and if you’re curious about what is the VAT rate in Bulgaria, the answer is that in most cases it is 20%, although some exemptions apply (such as a 9% VAT rate for tourism businesses and services).
So, how exactly does VAT work in Bulgaria? First, it is important to understand what is value added tax. A brief summary of this tax system indicates that VAT is:
- A general tax that is levied as a percentage of a total cost;
- It applies to all commercial activities, which produce and distribute goods and provide services. Regarding the aspect of the production and distribution chain, VAT is collected fractionally through a system of partial payments. Then, ultimately, the VAT registered business (or taxable person) deducts from the VAT they have accumulated in the chain the “amount of tax they have paid to other taxable persons on purchases for their business activities”;
- Not everyone is required to pay VAT on a compulsory basis – some individuals are exempt. This point is due to the tax threshold, which is different for every EU member state;
- VAT is also commonly referred to as a consumption tax that the consumer bears and is not a tax that is borne by the business; and
- VAT is paid to the revenue authorities in Bulgaria by the relevant taxable person. This, however, is done because the actual VAT is paid by the buyer to the seller as part of the final selling price.
We have already mentioned “taxable persons” above, but let’s take a closer look at who this person is and what exceptions there are from the general rule. According to VATA, a taxable person is referred to as any person “who independently carries out an economic activity”, irrespective of the purpose or results of such activity. A taxable person may also be considered a person who performs “accidental onerous intra-EU supplies of new transport vehicles.”
At this stage, you may be wondering what actually constitutes “independent economic activity”. The answer is somewhat complex, but we will provide a brief and non-exhaustive summary below. Independent economic activity, therefore, may be classified as activity that includes:
- Service suppliers (including mining and agriculture);
- Individuals practising a liberal profession such as private enforcement agents and notaries;
- Remunerative activity carried out on a continuing basis; and
- Remunerative activity as a regular occupation or business on a professional basis in order to obtain income from is also considered an independent economic activity.
However, there are some criteria that fall outside the scope of independent economic activity and these include:
- Activities carried out by natural persons under an employment relationship;
- An equivalent legal relationship; or
- Activities by a natural person(s) regarding the management and control of a legal entity.
Some organs, on the other hand, are exempt from VAT. Examples include the state as well as state and municipal authorities (although further exemptions apply to this category of institutions in Bulgaria).
VAT rates and exemptions
As mentioned earlier, the general VAT rate in Bulgaria is 20% although some industries or activities may be completely VAT exempt (and therefore pay 0% VAT) or they may be subject to a lower VAT rate such as 9%. Examples of VAT-exempt services and offerings include listed financial services, some health/medical services as well as education services.
VAT registration and simplification
If you are a business that provides a taxable supply of goods or services in Bulgaria (including those supplied taxed at the 0% rate), you have an obligation to register for VAT. The current law provides for a threshold of 50,000 BGN or approximately 25,000 EUR. Businesses which reach this threshold or exceed it are obliged to register for VAT if the amount has been reached or exceeded in a period of 12 consecutive months. And if you are not a Bulgarian resident but are considered a taxable person, you are required to apply for an obligatory VAT registration a minimum of seven days before you perform a taxable supply with the place of supply being Bulgaria.
In addition to VAT registration, there are also VAT rules regarding simplification of VAT in the country. These include: the Reverse Charge Regime, triangular transactions, special taxation procedures in business-to consumer (B2C) sales (OSS procedure) and rules regarding consignment stock.
Declaration requirements and penalties
As a final point of discussion, it’s also important to realise your obligations as a VAT registered person that falls above the VAT threshold in Bulgaria. In general, the tax period is considered one calendar month. The VAT liability or payment that needs to be made to the VAT/tax authorities is the difference between the total amount of output and input VAT calculated in a tax period. Furthermore, VAT returns are expected to be filed with the authorities and due VAT is to be paid by the 14th day of the month after the tax period which it relates to. VAT returns are submitted electronically.
Penalties for failing to submit an application for registration with the legally stipulated time limits risks incurring a financial penalty of between 500 BGN and 5,000 BGN. Other penalties may be faced by a defaulting individual or business owner, including for failures to:
- Charge VAT on the invoice issued;
- Failure to charge due VAT within the time limits provided by the law;
- Not issuing invoices; and
- Several other criteria.
Sources indicate that “in case of repeated violation, the amount of the respective penalties are usually doubled.”
The VAT landscape in Bulgaria may appear to be complex and tricky to navigate if you’re a foreign business owner. There are numerous exemptions and exceptions to all the rules and this, together with language barriers and a lack of knowledge of the institutions in the country, can make doing business somewhat more complicated for you. This is where Motion Advice comes in. Our tax and accounting services are specially tailored to meet your business’ unique needs. Don’t hesitate to get in touch with us for a highly professional and competent service related to your tax needs – whether VAT or anything else. We’re just a click away and ready to help!