What hidden profit distribution is in Bulgaria and how to avoid fines

Bulgaria has traditionally attracted entrepreneurs with its competitive tax rates: corporate tax (profit tax) here is only 10%, and dividend tax is only 5%. It seems that the rules of the game are as simple as they can be. However, in the pursuit of cost optimisation, business owners often make a mistake that turns into a serious financial disaster during a tax audit.

We are talking about hidden profit distribution (bg: скрито разпределение на печалбата). Bulgaria’s National Revenue Agency (NAP) monitors this violation with particular strictness, and the fines can instantly wipe out all the savings from doing business.

Let us take a detailed look at what this concept means, what it threatens you with and how to protect your business from sanctions effectively.

What is hidden profit distribution?

Hidden profit distribution is Bulgaria’s Corporate Income Tax Act (ZKPO) gives this phenomenon a clear legal definition. Put simply, hidden profit distribution is a situation where an owner, a shareholder or a person related to them receives money or material benefits from the company disguised as ordinary business expenses in order to avoid paying dividend tax.

Many founders reason as follows: “I am the sole owner of the company, all the money in the account is mine. What difference does it make whether I withdraw it for personal needs or record it as company expenses?” For the Bulgarian tax authorities the difference is fundamental. The company’s money is the separate property of a legal entity, not your personal funds.

Please note The most common examples in practice:

• Personal expenses at the company’s cost: Buying a family car, paying for a personal holiday, fuelling a private vehicle, restaurant receipts at the weekend or buying expensive household appliances for the home recorded as “office needs”.
• “Eternal” loans to the founder: When an owner borrows money from the company at 0% or a symbolic interest rate and does not repay it for years. NAP treats such long-term loans as a hidden dividend.
• Transactions at inflated or understated prices: For example, the company rents premises or a car from the director’s wife at a price significantly above the market rate in order to artificially reduce the company’s profit.

The tax trap: consequences and fines

If a tax inspector discovers hidden profit distribution during an inspection or audit, the legislation triggers a mechanism of triple financial punishment:

1. Non-recognition of expenses (10%): The amount of personal expenses is entirely excluded from the company’s costs. The financial result is artificially increased, and the company is charged an additional 10% corporate tax plus interest for the whole period of delay.
2. Dividend tax (5%): The hidden amount is recognised as a dividend. The individual (the owner) is charged an additional 5% dividend tax (also with accrued interest).
3. Property sanction (20%): Under Article 267 of the ZKPO, concealing the fact of profit distribution carries a fine of 20% of the entire amount of the identified violation.

Simple arithmetic: If you recorded 50 000 euros of personal spending as company expenses, then following a NAP audit you will have to pay: 5 000 euros (profit tax) + 2 500 euros (dividend tax) + 10 000 euros (the 20% fine) + interest for late payment. In total: more than 35% in net losses instead of the lawful 15% under an official distribution.

How to avoid fines: a step-by-step guide

Bulgaria’s tax system leaves legal ways to put the situation right. To avoid large fines, a business must strictly follow four rules:

Step 1. Keep personal and corporate finances strictly separate (Ongoing)
Rule out any purchases of groceries or personal items with the company card. All company expenses must have a clear economic justification and be directly related to its activity. Every expense must be supported by a properly issued invoice (фактура).

Step 2. Arrange loans on market terms (When transferring money)
If the founder genuinely needs to borrow the company’s working capital, draw up an official loan agreement. The key condition is that the interest rate must correspond to the market rate (use the average interest rates of the Bulgarian National Bank — BNB as a guide). Interest-free loans are a guaranteed fine.

Step 3. Keep control of the company’s cash desk (Касова наличност) (Monthly)
One of NAP’s main targets is the huge virtual amounts of cash held in the cash desk according to the reports, which are physically not in the office (because the director has taken them). Audit the cash desk regularly and distribute dividends officially in good time.

Step 4. Use the amnesty through declaration (Before filing the annual return)
If you discover that hidden distribution has nevertheless taken place (for example, the accountant identified personal spending when closing the books), declare it voluntarily. To do this you need to complete Part VII (Част VII) of the Annual Tax Return (ГДД по чл. 92 от ЗКПО).

The main tip: the power of voluntary disclosure

If you state the amount of hidden profit yourself in Part VII of the annual return and pay 10% profit tax and 5% dividend tax on it, the law fully releases you from the harshest penalty — the 20% property sanction.

If you have missed the standard filing deadline, you still have the legal right to submit a corrective return by 30 September of the current year (under чл. 75, ал. 3 от ЗКПО), which also makes it possible to avoid this sanction. The main thing is to do it before NAP officially schedules an inspection or audit of your company.

Summary for the owner

Bulgarian tax law is favourable to those who play by the rules. Do not try to disguise personal expenses as the company’s operating costs. It is far more profitable and safer to pay official dividends on time, paying a clean 5% tax, and to run the business without risk from the tax authorities.