Doing Business in Bulgaria

Doing Business in Bulgaria www.bakertillyinternational.com

This guide has been prepared by Baker Tilly, an independent member of Baker Tilly International. It is designed to provide information on a number of subjects important to those considering investing or doing business in Bulgaria. Baker Tilly International is the world s 8 th largest network of independent accounting and business advisory firms by combined fee income, and is represented by 154 firms in 133 countries and 27,000 people worldwide. Its members provide high quality accounting, assurance, tax and specialist business advice to privately held businesses and public interest entities. This guide is one of a series of country profiles compiled for use by Baker Tilly International member firms clients and professional staff. Copies may be downloaded from www.bakertillyinternational.com. Doing Business in Bulgaria has been designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this guide may not be comprehensive and recipients should not act upon it without seeking professional advice. Facts and figures as presented are correct at the time of writing. Up-to-date advice and general assistance on Bulgarian matters can be obtained from Baker Tilly, contact details can be found at the end of this guide. December 2015 Baker Tilly is the trading name of Baker Tilly Klitou and Partners Business Services EOOD

Contents 1 Fact Sheet 2 2 Business Entities and Accounting 4 2.1 Companies 4 2.2 Partnerships 5 2.3 Sole Proprietor 6 2.4 Branches and Representative Offices 6 2.5 Audit and Accounting Requirements 6 2.6 Filing Requirements 7 3 Finance and Investment 8 3.1 Exchange Control 8 3.2 Banking and Sources of Finance 8 3.3 Investment Incentives and Restrictions 9 4 Employment Regulations 10 4.1 General Employment Matters 10 4.2 Visas 11 4.3 Trade Unions 11 5 Taxation 12 5.1 Corporate Income Taxes 12 5.2 Personal Taxes 13 5.3 Employment Related Costs and Taxes 13 5.4 Withholding Taxes on Payments Abroad 14 5.5 Value Added Tax (VAT) 14 5.6 Other Taxes 15 5.7 Tax Incentives for Businesses 16

2 1 Fact Sheet Facts and figures as presented in sections 1 through 4 are correct as at 11 December 2015. Geography Location: Southeastern Europe Area: 110,879km 2 Land boundaries: Coastline: Climate: Terrain: Time zone: Romania, Serbia, Macedonia, Greece and Turkey Black Sea Temperate; cold, damp winters and hot, dry summers Mostly mountains with lowlands in the north and in the southeast GMT +2 (GMT +3 during daylight saving time) People Population: 7.20 million (December 2014) Religion: Language: Eastern Orthodox 59.4%, Muslim 7.8%, other 1.7%, none 3.7%, unspecified 27.4% (2011 estimates) Bulgarian (official) Government Country name: Government type: Capital: Administrative divisions: Republic of Bulgaria Parliamentary democracy Sofia 28 provinces

Doing Business in Bulgaria 3 Political situation The unicameral National Assembly has 240 seats. The Head of State is the President, who is elected by popular vote for a five-year term. The Head of Government is the Prime Minister, who is elected by the National Assembly. The Council of Ministers is nominated by the Prime Minister and elected by the National Assembly. Economy GDP per capita: US$7,851 (2014) GDP real growth rate: 1.5% (2014) Labour force: 3.38 million (Q3 2015) Unemployment: 8.3% (Q3 2015) Currency (code): Bulgarian lev (BGN)

4 2 Business Entities and Accounting The main company forms in Bulgaria are the limited liability company and the joint stock company. Other business forms include partnerships, sole proprietors, and branches. 2.1 Companies 2.1.1 Limited liability companies A limited liability company may be formed by one or more Bulgarian or foreign natural or legal persons. The liability of members is generally limited to the amount of their capital contribution. The minimum share capital requirement is generally BGN2. Limited liability companies are administered by the annual general meeting, and are managed by one or more managers. If there is a sole shareholder, this shareholder exercises the powers of the annual general meeting, and may represent and manage the company personally or through an appointed manager. One or more auditors (registered auditors where required by legislation) must also be appointed by the annual general meeting. 2.1.2 Joint stock companies A joint stock company may be formed by one or more Bulgarian or foreign natural or legal persons. The liability of members is generally limited to the amount of their capital contribution. The minimum share capital requirement is generally BGN50,000. Alternative minimum share capital requirements apply to certain companies, eg banks and insurance companies. Joint stock companies are administered by the annual general meeting. If there is a sole shareholder, this shareholder exercises the powers of the annual general meeting. A joint stock company may be managed in one of two ways. Under the one-tier system, the company is managed by a board of directors with a minimum of three and a maximum of nine directors. Under the two-tier system, the company is managed by a managing board (with a minimum of three and a maximum of nine members), which is controlled by a supervisory board (with a minimum of three and a maximum of seven members). Registered auditors must also be appointed by the annual general meeting.

Doing Business in Bulgaria 5 2.1.3 Company names and registration The company name must include its organisational form or relevant abbreviation. Companies must be registered in the Commercial Register. 2.2 Partnerships There are three types of commercial partnership in Bulgaria: the general partnership, the limited partnership, and the partnership limited by shares. Partners may generally be Bulgarian or foreign natural or legal persons. 2.2.1 General partnerships A general partnership may be formed by two or more partners. Partners are jointly and severally liable to an unlimited extent for the debts and obligations of the partnership. The partnership name must include the surname of one or more of the partners, and include its organisational form or relevant abbreviation. General partnerships must be registered in the Commercial Register. 2.2.2 Limited partnerships A limited partnership may be formed by two or more partners. General partners are jointly and severally liable to an unlimited extent for the debts and obligations of the partnership. The liability of limited partners is limited to the amount of their agreed contribution. The partnership name must include the name of one or more of the general partners, and include its organisational form or relevant abbreviation. If the partnership name includes the name of a limited partner, that partner has unlimited liability in respect of the partnership s creditors. Limited partnerships must be registered in the Commercial Register. 2.2.3 Partnerships limited by shares A partnership limited by shares may be formed by general partners. There must also be at least three limited partners whose liability is limited to the amount of their capital contribution. The provisions relating to joint stock companies generally apply to partnerships, unless otherwise provided for by legislation. A partnership limited by shares is administered by the annual general meeting, and managed by a board of directors consisting of the general partners. The partnership name must include its organisational form or relevant abbreviation. Partnerships limited by shares must be registered in the Commercial Register.

6 2.3 Sole Proprietor An individual that is domiciled in Bulgaria may generally conduct business activities as a sole proprietor. Sole proprietors must be registered in the Commercial Register. 2.4 Branches and Representative Offices A foreign company that is registered to carry out commercial activities under its jurisdiction s national legislation may carry out commercial activities in Bulgaria through a branch. A branch is not a separate legal entity. Branches must be registered in the Commercial Register. A foreign company that is registered to carry out commercial activities under its jurisdiction s national legislation may establish a representative office in Bulgaria. A representative office is not a separate legal entity. Representative offices may not conduct commercial activities, but may conduct activities such as marketing and promotion. Representative offices must be registered with the Bulgarian Chamber of Commerce and Industry. 2.5 Audit and Accounting Requirements Enterprises are generally required to prepare annual financial statements that give a true and fair view of the financial position of the enterprise, its reported financial result, and any changes in cash flows and in equity ownership. Annual financial statements must include a balance sheet, profit and loss account, statement of cash flows, owner s equity and notes. From 1 January 2016, annual financial statements must include a balance sheet, statement of income and expenditure, and application. Enterprises in the Republic of Bulgaria, with the exception of small and medium-sized enterprises (SMEs), are required to prepare and present their annual financial statements on the basis of the International Financial Reporting Standards (IFRS), as adopted by the EU. SMEs (as defined below) should apply either the National Financial Reporting Standards for Small and Medium-Sized Enterprises (NFRSSME), or, they may opt to voluntarily apply the IFRS, as adopted by EU. However, once having selected the IFRS, as adopted by EU as an applicable framework, SMEs may not revert to the NFRSSME.

Doing Business in Bulgaria 7 From 1 January 2016, IFRS must be used by public companies and large companies, and micro, small, and medium companies must use national accounting standards. Large companies will be required to use national accounting standards from 1 January 2017. Companies that will be required to use national accounting standards may opt to apply IFRS provided it is not done to change the accounting basis. Small and medium enterprises, according to the Accountancy Act, are those that do not exceed at least two of the following criteria in at least one of the previous two reporting periods: Average number of personnel for the preceding year: 250 persons Annual turnover: BGN15m Total assets as of 31 December: BGN8m From 1 January 2016, new criteria will apply to determine whether a company is micro, small, medium, or large. Primary accounting documents must be kept in Bulgaria, using Arabic digits and the Bulgarian currency. Certain accounting documents may also use a foreign language and currency. Business transactions contained within accounting documents that are in a foreign language must be translated into Bulgarian. From 1 January 2016, all foreign language accounting documents must be translated into Bulgarian where required by law. Accounting ledgers and financial statements must be kept for a period of 10 years. Payroll must be kept for 50 years. 2.6 Filing Requirements All limited liability companies are required to file their annual financial statements/annual consolidated financial statements in the Commercial Register by 30 June of the following year. All joint stock companies are required to publish their audited annual financial statements/ annual consolidated financial statements in the Commercial Register by 31 July of the following year (by 30 June from 2016).

8 3 Finance and Investment 3.1 Exchange Control There are generally no foreign exchange controls. However, certain operations, receivables and liabilities must be reported to the Bulgarian National Bank (BNB). Anti-money laundering legislation requires certain entities and individuals, including banks and financial institutions, insurance companies, notaries, chartered auditors, and legal advisors in respect of certain activities, to identify their customers and to report transactions suspected of involving money laundering or funds of a criminal origin to the Financial Intelligence Directorate (FID) of the State Agency for National Security. 3.2 Banking and Sources of Finance The Bulgarian National Bank (BNB) is responsible for (amongst others) financial stability, payment systems, issuing national currency, and supervising credit institutions. The Financial Supervision Commission (FSC) is responsible for supervising the non-banking financial sector. Commercial banks operating in Bulgaria provide the majority of financial services. There are generally no restrictions on foreigners opening bank accounts in Bulgaria (certain documentation and a minimum deposit may be required), or on accounts containing foreign currency. The Bulgarian Stock Exchange (BSE) provides a marketplace for listing and exchanging securities. Private equity and venture capital investors provide investment in Bulgaria.

Doing Business in Bulgaria 9 3.3 Investment Incentives and Restrictions For business related incentives, see 5.7. There are generally no restrictions on foreign business investment in Bulgaria.

10 4 Employment Regulations For employment tax considerations, see 5.3. 4.1 General Employment Matters 4.1.1 National employment standards Legislation provides minimum rights and conditions of employment in Bulgaria, including maximum daily and weekly working hours, rest periods, paid annual leave entitlement, public holiday entitlement, and maternity and adoption leave rights. A contract of employment may be for an indefinite or fixed duration, and must generally be concluded in writing. A signed copy of the employment contract must be given to the employee before the commencement of work. The contract of employment must include: Place of work Position and type of work Date that the contract is concluded and the date that work commences Duration of the contract Paid annual leave entitlement Notice periods required for terminating the contract of employment (which must be the same for both parties) Basic and supplementary pay and the pay frequency, and Normal daily or weekly working hours. Working terms and conditions that do not contravene the minimum legislative requirements may also be determined by a collective agreement. A contract of employment may include a trial period of employment not exceeding six months. The contract must state whose benefit the trial period is for (the employer or employee); if this is not stated, it is presumed to be for the benefit of both parties. The benefitting party may terminate the contract of employment during the trial period without notice.

Doing Business in Bulgaria 11 An employment contract may be terminated without notice in certain circumstances, including in cases of written mutual consent, where a fixed-term contract has expired, where the agreed work has been completed, or where the employee is unable to work for certain medical reasons. An employee may terminate a contract of employment of indefinite duration by providing 30 days written notice. The contract of employment may require a longer notice period; however, the required notice period may not exceed three months. An employee may terminate a contract of employment in writing without notice in certain circumstances, including where the employer has delayed the payment of remuneration or another benefit. An employer may terminate a contract of employment by providing the required notice period in certain circumstances, including closure of the business, a reduction in the volume of work, or where the employee lacks the capacity to efficiently execute the work. An employer may terminate a contract of employment without notice in certain circumstances, including imprisonment of the employee, or for disciplinary reasons. The statutory monthly minimum wage is BGN380 (BGN420 from 1 January 2016). 4.1.2 Pensions and other benefits Social security contributions (see 5.3.2) generally provide associated benefits. 4.2 Visas Citizens of certain countries (including EU member states and Schengen area countries) do not generally require a visa for certain visits to Bulgaria. Citizens of other countries generally require a visa. Visas available for entry into Bulgaria include: Visa A airport transit visa Visa B short stay visa, and Visa C long stay visa. For further information on Bulgarian visa requirements, visit www.mfa.bg. There are generally no restrictions on foreigners purchasing buildings in Bulgaria; however, non-eu/eea citizens may not generally purchase land. 4.3 Trade Unions Trade union organisations may negotiate and conclude collective agreements with an employer or employers organisation in respect of office and factory employees.

12 5 Taxation Facts and figures as presented in section 5 are correct as at 3 December 2015. 5.1 Corporate Income Taxes Resident legal entities, which are legal entities incorporated under Bulgarian legislation, and certain companies and cooperatives based in Bulgaria that are entered in a Bulgarian register and are incorporated under EC legislation, are generally subject to tax on their worldwide income. Non-resident legal entities are generally subject to tax on their Bulgarian source income, subject to the terms of any relevant tax treaty. The standard corporate income tax rate is 10%. Certain gambling activities are subject to alternative tax at the rate of 15%, or to fixed tax rates. Qualifying shipping businesses may choose to be taxed under a tonnage tax scheme. Taxable income must generally include any taxable capital gains. Gains from the disposal of qualifying financial instruments traded on a regulated market are exempt. Unutilised losses can generally be carried forward for up to five years. Losses cannot generally be carried forward in cases where a business has been transferred. Group tax consolidation is not available in Bulgaria; consequently losses cannot be offset against the profits of another company in the same group. The tax year is the calendar year. The corporate income tax return, and an annual activity report, is generally due for filing by 31 March of the following year. Taxable entities are generally required to make monthly or quarterly advance payments of corporate income tax based on estimated current year taxable profit. Taxable entities are not generally required to make advance payments in their year of incorporation, or if net sales revenue in the previous year did not exceed BGN300,000. Monthly advance payments are generally required by legal entities whose net sales revenue in the previous year exceeded BGN3m; otherwise advance payments are made on a quarterly basis. Any remaining corporate income tax due is payable by 31 March of the following year. Taxable entities that submit their corporate income tax return and annual activity report electronically by 31 March, and pay their corporate income tax by the same deadline, are generally entitled to a 1% corporate income tax discount, up to a maximum of BGN1,000.

Doing Business in Bulgaria 13 5.2 Personal Taxes Resident individuals are generally subject to tax on their worldwide income. Non-resident individuals are generally subject to tax on their Bulgarian source income, subject to the terms of any relevant tax treaty. Individuals are generally subject to personal income tax on taxable income at the rate of 10%. A 15% rate generally applies to business income. Taxable income must generally include any taxable capital gains, subject to exemptions (eg for sales or exchanges of residential property held for at least three years). Inheritance and gift taxes generally apply at rates ranging from 0.4% to 6.6%, subject to possible allowances and certain exemptions (eg for qualifying relatives). There is no wealth tax in Bulgaria. 5.3 Employment Related Costs and Taxes 5.3.1 Fringe benefits There is no separate fringe benefits tax. Unless specifically exempt, taxable benefits-in-kind form part of the taxable income of individuals and are subject to personal income tax. 5.3.2 Social security costs Employers and employees are generally required to make the following social security contributions: Contribution Category Employer Rate Employee Rate Pension contributions 9.9% 7.9% Unemployment contribution 0.6% 0.4% Sickness and maternity 2.1% 1.4% Health insurance 4.8% 3.2% Work-related injuries and diseases Between 0.4% and 1.1%, depending on risk categorisation N/A

14 5.4 Withholding Taxes on Payments Abroad The rates of withholding tax on the following payments made abroad by companies are generally: % Dividends 5 Interest 10 Royalties 10 Dividend, interest and royalty payments that satisfy the provisions of the EU Parent-Subsidiary Directive or the EU Interest and Royalties Directive are not subject to withholding tax. For payments made to recipients in countries with which Bulgaria has a double tax treaty, the rates of withholding tax may be reduced under the terms of the treaty. 5.5 Value Added Tax (VAT) VAT is generally levied on the supply of goods and services in Bulgaria, on the intra-community (EU) acquisition of goods, and on the importation of goods. The standard VAT rate is 20%. A reduced rate of 9% applies to accommodation provided by hotels and similar establishments. A 0% rate applies to certain supplies, including exports, intra-community supplies, and international transport of passengers and goods. Certain supplies are VAT exempt, including health services, social services, educational services, and certain financial and insurance services. Traders are generally required to register for VAT purposes if taxable turnover (as defined) in the previous 12 months is BGN50,000 or more. Registered traders can generally recover the VAT with which they themselves are charged on their purchases of goods and services, subject to conditions and possible exceptions.

Doing Business in Bulgaria 15 5.6 Other Taxes 5.6.1 Stamp duty There is no stamp duty in Bulgaria. 5.6.2 Immovable property tax An annual immovable property tax is generally levied on immovable property, subject to exemptions. The rates are set by municipalities from a range of 0.01% to 0.45%. 5.6.3 Transfer tax A transfer tax is generally levied on transfers of immovable property and motor vehicles, subject to exemptions. The rates are set by municipalities from a range of 0.1% to 3%. 5.6.4 Excise taxes Excise taxes are imposed certain goods, including alcohol, alcoholic beverages, tobacco products, energy products, and electricity. 5.6.5 Other taxes Other taxes in Bulgaria include insurance premiums tax, tourist tax, and various local taxes.

16 5.7 Tax Incentives for Businesses 5.7.1 Employment related incentives Taxable entities operating in the production sector in municipalities where unemployment is higher than the national average may benefit from tax relief on up to 100% of profits from production activities. Qualifying conditions include: Production activities must be carried out only in municipalities where the unemployment rate in the previous year was at least 25% higher than the national average At least 10 employees must be supported during the tax period, at least 50% which must be directly engaged in production, and At least 30% of employees must be domiciled in the municipality. Tax benefits may generally apply for a further five years in cases where the required unemployment rate in the municipality is no longer met. Tax incentives are also available in respect of hiring the unemployed (salary and social security cost deductions), hiring the disabled (100% corporate income tax relief), and providing educational scholarships (recognition of accounting costs).

Doing Business in Bulgaria 17 5.7.2 Agricultural incentive Qualifying agricultural producers may benefit from a 60% corporate income tax relief in respect of profits from the production of unprocessed plant and animal products. Certain conditions must be met, including the requirement that the relief amount must is invested in new buildings or new agricultural equipment necessary for producing unprocessed plant or animal products by the end of the following year.

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