In theory, dividends are payments made by a corporate legal entity to its shareholders, which are usually distribution of profits. A corporation in Bulgaria has mainly 2 options:
- to reinvest the profits. Reinvested dividends are tax-exempt in Bulgaria.
- to distribute the profit to the shareholders.
The dividends could be paid in cash (bank wire) or as new shares.
Anyway, the dividend is considered income and as a such is subject to personal income tax domestically.
By Bulgarian law, dividends and liquidation shares, distributed by resident legal persons in favour of:
- non-resident legal persons (legal entities), except for the cases when dividends are realized by the non-resident legal person by means of a permanent establishment in Bulgaria;
- resident legal persons who are not traders.
NB! Withholding tax is not levied on dividends and liquidation shares when they are distributed to:
- a local legal person participating in the company’s capital as a representative of the State;
- a contractual fund;
- a non-resident legal person that is resident for tax purposes of a Member State of the European Union or a State party to the Agreement on the European Economic Area.
But what is the tax percentage?
The tax rate for the tax on income as per Art.194 of the CITA (dividends and liquidation shares) shall be 5 per cent.
In Bulgaria, withholding tax may not be necessary to be paid (0% dividend tax) if shareholders in the Bulgarian companies are tax residents of an EU country and they are not residents of a third state on the grounds of a double tax treaty. Moreover, if the shareholders are payers of corporate income tax in their resident state and they are not entitled to any tax exemptions, then they are not subject to withholding tax. It also applies to non-residents that hold at least 15 percent of the shares in the Bulgarian company that distributes the dividends for at least two years.
Once a dividend was received from a Bulgarian entity, the tax is applied at the source, therefore the recipient does not have to report and therefore pay any personal income tax on the dividends. However, if the dividends are received from foreign entities, they are part of the tax return and they must be reported, as they will be taxed as part of the individual’s annual personal income tax return.
The income payers deducting withholding tax pursuant to Art. 194 are obliged to pay the taxes due by the end of the month following the quarter when the decision to distribute dividends or liquidation shares was taken.
In case you need more information or have any questions regarding dividends or investments in Bulgaria, do not hesitate to contact us.