«Данък при източник» — what makes this tax so tricky?

That is indeed the case, but Bulgarian taxation has its own specifics and provides for a tax «at source», which is withheld not from the party receiving the profit, but from the party purchasing certain services. What kind of tax is this and who has to pay it?

Features of the tax «at source»

This tax differs from others primarily in that it is paid not by the party receiving the profit, but by the party buying the services. It is charged irrespective of the company’s turnover, on a specific transaction, and it is paid not in the country where the 10% corporate tax is paid, but in another state. That is, a Bulgarian company paying for services in another state may pay a tax of 10% on its expense in Bulgaria. This sounds rather odd in ordinary terms, since it would seem logical to pay tax on the income side. However, it turns out that some expenses do not reduce taxable profit.

In most cases, if a Bulgarian company uses the services of a foreign firm, it does not have to pay any additional tax. But there are exceptions to this rule. They include, for example, technical services.

What are «technical services»?

Technical services include:

• assembly and installation of tangible assets;
• market research;
• consulting services of any kind.

The last point is especially important: many firms state in their documents that they receive consulting services without realising what obligations such activity entails. This is particularly relevant for companies purchasing computer programs.

It should be borne in mind that the setup and installation of intangible assets does not count as a technical service. For example, installing a server is a technical service, whereas installing software is not.

Technical services also do not include:

• advertising services;
• subsequent repair and maintenance of tangible assets;
• legal representation and administrative services;
• intermediary services;
• audits;
• product testing;
• training; remuneration under staff provision contracts; insurance services;
• subscription to GPS monitoring.

Who has to pay?

Under Art. 195 of the ЗКПО, if a Bulgarian firm pays a foreign company remuneration for consulting services, it must also pay the tax «при източника» on that amount. What matters in this case is that the services are not provided through a fixed place of business of the foreign company (for example, its Bulgarian branch). If no tax is paid on the payment, this constitutes a breach of tax law.

If Bulgaria has an agreement with another country on taxation, that agreement takes precedence over domestic Bulgarian laws. International agreements often regulate precisely the taxes on a company’s income from a source in another country. So, for example, if a German company provides consulting services to a Bulgarian one, the remuneration should not be subject to the tax «при източника».

The rules for applying a tax agreement are set out in the tax code, in particular in Art. 135. According to it, the foreign party must submit to the National Revenue Agency (NAP) documents confirming that:

1. it is a resident of another country and does not carry out activity in Bulgaria;
2. it has received income from Bulgaria;
3. the conditions for applying the agreement are met.

The foreign company must file a special request with NAP, and within 60 days the tax agency will issue an opinion on the application of the agreement. Since this procedure may prove too complicated and costly, a simplified version is provided for where the payment to the counterparty in another country does not exceed 500 thousand leva. In that case no request is filed with NAP, and the grounds are provided directly to the firm paying the income.

Thus, when a foreign company provides technical services, the Bulgarian recipient of those services must pay a special tax. There are exceptions to this rule, provided for in agreements with other countries. Such agreements are listed in the СИДДО (the list of agreements on the avoidance of double taxation). Before concluding a transaction, you must study the agreement with the relevant country in order to understand which taxation rules will apply.

Drawing up the contract correctly

To avoid having to pay an additional tax, you need to be very careful when concluding contracts with foreign counterparties. In particular, in many cases (if there is no agreement on the avoidance of double taxation with the counterparty’s state) the contract should not mention market research, consulting or other technical services.

Advice from specialists will help you avoid mistakes when concluding a contract and keep your company out of the red.

Accounting services for your company in Bulgaria.

Business fines in Bulgaria

Company registration in Bulgaria