Patent Tax in Bulgaria

Setting up a company is not the only way to run a commercial activity in Bulgaria. In some cases such an activity can also be carried out as a natural person, and with a fixed tax that does not depend on the profit.

In Bulgaria, under the Law on Local Taxes and Fees (ЗМДТ), there is a patent tax on certain types of activity – patent activities. It has to be paid to the Obshtina (the local municipality) by legal entities (EOOD (single-member LLC)) and natural persons, including sole traders (ЕТ, or едноличен търговец in Bulgarian).

Important information about the tax

Which types of activity are considered patent activities and are subject to the corresponding tax? The hotel business (the number of rooms is limited), cafés, restaurants, patisseries, snack bars and bars (up to 3 stars), paid car parks, retail trade (premises of less than 100 sq. m.), fitness centres, various services and much more. Depending on the type of activity (in particular, the risk and the potential earnings), the amount of the tax ranges from 1 to 28000 leva. The exact amounts of the tax are set by the relevant municipality, but in any case a fixed sum is paid regardless of the expected income.

The patent tax is a kind of alternative to the 10 percent corporate tax or the tax on total income, i.e. the patent tax can be paid instead of them. In many cases this is a more advantageous solution.

The formula for income tax, like that for corporate tax, is calculated as follows: 10% of the difference between receipts and income (after payment of social security contributions). If you choose the patent tax, everything is simpler: you pay a fixed sum, which depends on the type of activity and the municipality, but not on the income. Social security contributions also have to be paid in this case.

The tax has to be paid by natural persons, including sole traders, as well as by legal entities engaged in patent activity. Important conditions: the annual turnover must be less than 100000 leva, and the person must not be registered for VAT (with some exceptions). The income of these persons from patent activity is not subject to income or corporate tax.

Last year amendments to the ЗМДТ came into force. In particular, the maximum turnover for patent taxation was aligned with the VAT threshold, and new patent taxation rules were introduced for legal entities operating in the entertainment and catering sector.

Persons engaged in patent activity must submit a tax return to the relevant municipality by 31 January. If the activity was started after this date, the return must be submitted immediately before the activity begins. The amounts are fixed and do not depend on the date the activity starts: if work was started on the last day of the first quarter, the whole quarter still has to be paid for.

The tax information can be updated if the circumstances that affect the amount of the tax change.

Those who submit the return and pay the patent tax in full by 31 January are entitled to a 5% discount. Those who cannot pay the whole sum at once can pay the patent tax in instalments, without the discount, 4 times a year. The tax for the first quarter is paid by the end of January, for the second by the end of April, for the third by the end of July, and for the fourth by the end of October.

If there are changes in the patent activity that may affect the amount of the tax, a corrective return must be submitted within 7 days after the changes occur.

Tax returns should be submitted to the municipality on whose territory the activity is carried out. If the activity is not tied to a specific address, the returns are submitted at the place of permanent residence of the natural person or sole trader.

Fines are provided for late submission of returns and late payment of the tax, and they can reach 500 leva. If incorrect data are stated in the return and this has led to a reduction in the amount of the tax, the fine may be up to 1000 leva.

Is it possible to pay less?

The following tax reliefs are provided for persons paying the patent tax:

• Natural persons with a disability (a 50 percent or greater reduction in working capacity by decision of the ТЕЛК or an equivalent body) benefit from a relief of 50% of the patent tax if during the year they carry out the activity on their own, without hiring employees.
• Natural persons, including sole traders, who carry out 2 or 3 types of patent activity on their own pay the patent tax for only one of them (the one with the highest patent tax). If there are more than three types of activity, the relief cannot be applied.
• Natural persons, including sole traders, who are pensioners and carry out patent activity listed in points 5, 6, 8 – 15, 18 – 20, 25, 27 – 29 and 31 of Annex No. 4 to the ЗМДТ benefit from a 50% relief if they carry out the activity on their own without hiring employees.
• Persons who use a workplace to train apprentices under the Law on Crafts (a document from the relevant regional chamber of crafts is required) and who carry out patent activity in the field of hairdressing and veterinary grooming services are entitled to a 50 percent relief for the workplace.

Registering an LLC or paying the patent tax? Which to choose?

There is no universal answer to this question – each case deserves an individual approach and discussion. The specialists of Bulgarian Expert are ready to advise you on the options that will be advantageous in your particular situation.

It is important to clarify that it is possible to register an EOOD and pay the patent tax and social security contributions; the law provides for such an option. Nevertheless, when carrying out patent activity it is also possible to do without registering a company, limiting yourself to paying the patent tax.

In many cases, for those engaged in small business, choosing to pay the patent tax instead of registering an EOOD may be a more advantageous solution. The patent tax rate is fixed and does not depend on the profit, which makes financial planning easier and reduces the tax burden, and it is also convenient when choosing an activity with a low turnover.

At the same time, it must be taken into account that the patent tax has to be paid even in the case of losses.

The list of types of patent activity and the amounts of the patent tax can be seen here https://lex.bg/en/laws/ldoc/2134174720 (Annex No. 4), and exact information can be obtained from the municipality at the place where the activity is carried out. Before making a final decision, it is recommended to consult a specialist even before starting the activity.