Guide to registering a business in Bulgaria: Tax differences between ET and EOOD

Although in both cases you remain the sole owner of your business, the state views these forms in completely different ways. The differences in the rules of the game — from paying taxes to personal liability — can radically affect your income and your security.

Tax arithmetic: who pays less?

The main mistake made by new entrepreneurs is to look only at the basic tax rate, forgetting about social contributions (осигуровки) and taking money out into their own pocket. Since Bulgaria fully switched to the euro, accounting has become maximally transparent, and the tax nuances even more obvious.

The ET pitfall: annual equalisation

Yes, an ET has no dividend tax — everything earned is legally already your personal money. But the basic tax rate is higher (15%). The main drawback of an ET lies in the so-called “годично изравнявание на осигуровки”. At the end of the year the tax authority (National Revenue Agency, NAP) looks at your net profit. If it turns out to be high, you will have to pay additional social and health contributions on that entire amount (within the maximum insurable income set by the state). For a high-income business this becomes a serious extra financial burden.

Exception: If the ET’s activity falls under the patent tax (small hairdressing salons, repair workshops, family hotels), a fixed amount is paid to the local municipality, and the 15% tax is not applied to the profit.

The EOOD strategy: divide and rule

An EOOD pays the lowest corporate tax in the European Union — 10%. The net profit stays in the company’s accounts. To officially take it for your personal use, you arrange a distribution of dividends and pay just 5% on that amount.

How this looks in practice (sample calculation):
Let’s say the company earned a net profit of 10 000 euros.
1. Profit tax (10%) = 1 000 euros. 9 000 euros remain on the balance sheet.
2. Dividend tax (5% of 9 000 euros) = 450 euros.
3. Result: 8 550 euros net end up on your personal card. The total net tax burden was only 14.5%.

Most important: no social contributions are payable on dividends. You can pay contributions on the minimum threshold set by law as the manager (director) and take all the remaining main profit out through dividends, legally saving thousands of euros on mandatory insurance.

Legal liability: what are you risking?

Taxes are only the visible part of the iceberg when choosing a business structure. Below the water are legal risks that can directly affect your personal life and family assets.

• An ET is liable for its obligations with all of its personal property. For the law, a sole trader and a private individual are one indivisible subject. If the business incurs losses, receives a large fine from the supervisory authorities or cannot pay its counterparties, bailiffs have every legal right to seize your personal bank accounts, personal car or personal real estate.
• An EOOD is liable only with the company’s own assets. The very legal term “limited liability” protects the owner. The founder’s personal property is completely insulated from business risks. If the firm goes bankrupt, you risk only the share capital (which can be purely symbolic — from 1-2 euros) and the property officially recorded on the firm’s balance sheet. Your personal home, car and family savings are protected by law.

Ease of management and closure

While at the start an ET often looks more attractive because of the cheap registration and the minimal set of documents, at the closing stage the roles change radically:

• Closing an ET can be done relatively quickly and simply — the whole procedure takes about a month and requires a minimum of bureaucracy.
• Liquidation of an EOOD (single-member LLC) is a long and strict bureaucratic marathon. Under Bulgarian law this process cannot take less than 6 months. It includes mandatory prior notification of the National Revenue Agency (NAP), publication in the Commercial Register and an official waiting period set by law for possible creditors to submit claims.

Final checklist: which one is right for you?

ET suits you better if:

• You are starting a micro-business (for example, a small retail outlet, services provided at home) with a modest planned turnover.
• Your activity falls 100% under the fixed patent tax in your municipality.
• You want instant access to the cash in the account without having to draw up dividend resolutions.

An EOOD is clearly right for you if:

• You are launching a consulting project, IT services, an agency, international trade or manufacturing.
• Your projected income is above average — as profit grows, an EOOD becomes many times more advantageous than an ET because of the enormous savings on insurance contributions.
• The business is potentially associated with financial risks, purchasing, renting premises or hiring employees (you need a reliable shield for your personal assets).
• In the future you may sell the business, scale it up or bring in partners (in an EOOD it is simple enough to transfer the shares before a notary, whereas an ET cannot be sold).