Tax Guide for US Expats Living and Working in Bulgaria
Who Is Liable For Income Taxes In Bulgaria
Territoriality. Individuals who are tax resident in Bulgaria are subject to income tax on their worldwide income. Individuals who are nonresident for tax purposes are subject to income tax
on their income earned in Bulgaria.
Definition of tax resident. An individual is considered tax resident for a calendar tax year if he or she satisfies either of the following conditions:
On any day in that year, he or she has spent more than 183 days in Bulgaria in the previous 12 months. His or her center of vital interests is considered to be in Bulgaria.
Days of entry and departure count as days of stay in Bulgaria.
The center of vital interests is considered to be in Bulgaria if the individual’s personal and economic interests are tightly connected to Bulgaria based on actual facts and circumstances such as family residence, real estate owned or place of work.
Tax residence status is determined for an entire tax year, which coincides with the calendar year. Part-year tax residence is not possible.
Income subject to tax
Employment income. Employed individuals are subject to income tax on remuneration (money or benefits in kind) paid or provided by or on behalf of an employer. Income derived from employment activities performed in Bulgaria has a Bulgarian source.
The following employment income is exempt from tax:
- The amount of per diems related to business trips within Bulgaria and abroad up to double the statutory amounts determined by law
- Travel and accommodation expenses relating to business trips covered by supporting documentation
- Certain social benefits provided by and taxed at the level of the employer
Employer-provided stock options are taxed at exercise as employment income.
Self-employment and business income. Self-employment and business income is income derived from professional services and business activities, such as the following:
- Income from activity as a sole entrepreneur
- Copyright royalties
- Agricultural income
- Forestry income
- Earnings from other self-employment and non-employment activities
A fixed deduction of 25% or 40% of gross revenue applies depending on the type of activity except that the actual expenses of the business may be deducted with respect to a sole entrepreneur’s activities.
Capital gains
Shares. Income derived from the sale of shares and other financial assets is taxable. Gains on disposals of securities traded through the Bulgarian or an EU/EEA stock exchange are exempt from tax.
The taxable gain is the positive difference between the total amount of profits realized during the year less the total amount of losses during the year, both determined for each transaction.
Real estate. Bulgarian and EU/EEA tax residents are not subject to tax on a gain derived from the disposal of one principal private residence in a year if the residence has been owned for at least three years. Such residents are also exempt from tax on gains derived from up to two other real estate properties if the properties have been owned for at least five years.
A fixed deduction of 10% of the taxable gain (sales price minus purchase price) on the disposal of real estate applies.
Exempt income. Income from scholarships, pensions derived from compulsory social security schemes in Bulgaria and abroad, alimony and certain insurance payments are not taxable.
Deductions
Donations. Gifts and donations to Bulgarian and similar EU/EEA charitable institutions and other welfare institutions are deductible up to 5% of the annual tax base. A deduction of up to 50% applies to gifts and donations to special funds for children’s medical treatment and assisted reproduction.
Mortgage interest. Interest paid on the first BGN 100,000 of a mortgage loan is tax deductible for married couples if all of the following conditions are satisfied:
- The taxpayer or his or her spouse is below the age of 35.
- The mortgage loan contract is entered into after the date of the marriage.
- The real estate subject to the mortgage is the only property owned by the family.
Mandatory social security and health insurance contributions. Social security and health insurance contributions made by individuals to mandatory Bulgarian and EU/EEA systems are deductible for tax purposes. Official documentation of the social security institution must be presented as proof for the paid contributions. The deduction can be applied on a monthly or on an annual basis.
Voluntary social security contributions. Deductions equaling up to 10% of the tax base may be claimed for voluntary pension contributions by individuals. In addition, deductions equaling up to 10% of the tax base may be claimed for voluntary health and life insurance contributions made by individuals to Bulgarian or EU/EEA authorized funds.
Tax rates.
The rate of income tax is a flat 10%, except for dividend income, which is taxed at a rate of 5%, and the income of sole entrepreneurs, which is taxed at a rate of 15%.
B. Inheritance and gift taxes
Inheritance tax is levied on all property located in Bulgaria and is paid by the recipient. Property located outside Bulgaria that is owned by Bulgarian citizens is also subject to inheritance tax.
Spouses, parents and more remote ancestors and direct descendants are not subject to inheritance tax. The following flat rates apply for determining the inheritance tax for other heirs:
- For brothers, sisters and their children, the tax rate ranges from 0.4% to 0.8% (determined by the local Municipal Council of the last permanent residence of the deceased) for an inheritance share over BGN 250,000
- For other heirs subject to inheritance tax, the tax rate ranges from 3.3% to 6.6% (determined by the local Municipal Council of the last permanent residence of the deceased) for an inheritance share over BGN 250,000
Property acquired as a gift is taxable unless the gift is given by a spouse or the gift is made between descendants. The tax base is the value of the property at the moment of transfer determined by the tax authorities or the Municipal Council. The applicable rates vary by location and type of property.
C. Social security
Contributions. Different social security regimes apply to employees and self-employed individuals. Social security contributions payable by self-employed individuals vary depending on the individual’s activity.
Individuals performing working activities in Bulgaria are subject to Bulgarian mandatory social security contributions unless an exemption is provided. Labor is divided into three categories, depending on the characteristics of the work performed. Professions involving harmful or risky conditions are included in the first or second category. The following table provides the rates effective from 1 January 2011 for contributions payable by employers and employees with respect to employees in the third labor category (normal work conditions) who were born after 1 January 1960 and work under employment contracts governed by the Labor Code.
We have been preparing US income tax returns for US Citizens and permanent residents living in Bulgaria for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Bulgaria and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Bulgaria tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Bulgaria Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Bulgaria, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Bulgaria.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email