Bulgaria – 5% tax rate on foreign source dividends distributed to a tax resident individual with the possibility of fully deducting the amount withheld abroad as withholding tax

As we will see in Bulgaria the tax rate on foreign source dividends distributed to a tax resident individual is 5% (5 percent) with the possibility of fully deducting the amount withheld abroad as withholding tax . Therefore:

  • If the tax paid abroad is higher than or equal to 5%, no tax is due in Bulgaria ;
  • If the tax paid abroad is less than 5%, only the balance up to 5% is paid in Bulgaria .

Let’s examine the case in detail.

For the purposes of tax treatment under the  Personal Income Tax Act – Закон за Данъците на Физическите Лица (ЗДДФЛ) , dividend income in Bulgaria, depending on the beneficiary and its source, can be divided into four groups:

  1.  dividends in favour of a natural person tax resident in Bulgaria from a source in Bulgaria ;
  2. dividends in favour of a foreign natural person (not a tax resident in Bulgaria) from a source in Bulgaria ;
  3. dividends in favour of a natural person tax resident in Bulgaria from a foreign source ;
  4. dividends in favor of a Bulgarian individual enterprise (едноличен търговец (ЕТ)), the source of the income being irrelevant  ( art. 38, c. 1  of the  Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ) .

In all four cases,  “dividend”  means the income defined in  § 1, item 5  of the  Additional Provisions (Допълнителните разпоредби (ДР))  of the Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ) , namely:

In all four cases,  the gross amount  of dividends  determined by the  dividend distribution resolution  (1)  is subject to taxation,  with  final taxation (and not advance) of  5% (5 percent) on the gross amount determined by the dividend distribution decision. ( Articles 38 , paragraphs 1 and 2  and Article 46, paragraph 3 of the Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ) .

Indeed:

    1. dividends in favor of a sole proprietorship;
    2. dividends and liquidation shares in favour of:
      a) a local or foreign natural person coming from Bulgaria;
      b) a local natural person coming from a foreign source.

Thus, in Bulgaria , the tax rate on dividends is 5% (5 percent) on the gross amount determined by the decision on the distribution of dividends, whether it is:

  • dividends in favor of a Bulgarian sole proprietorship;
  • Bulgarian source dividends and liquidation shares in favour of:
    • natural person tax resident in Bulgaria
    • natural person not a tax resident in Bulgaria;
  • foreign source dividends and liquidation shares in favour of:
    • a natural person who is a tax resident in Bulgaria.

Please note that in Bulgaria the rules regarding Controlled Foreign Companies (CFC)  [ Controlled Foreign Company (CFC) Rules – Provisions for Controlled Foreign Companies (CFC) ] do not apply  to the taxation of Individuals with Fiscal Residency.

Therefore, in Bulgaria, even in the case of a Tax Resident Individual who controls a foreign company classified as a Controlled Foreign Company (CFC), the tax rate on foreign-source dividends distributed to the tax resident individual is 5% (5 percent) with the possibility of fully deducting the amount withheld abroad as withholding tax.

The purpose of this article is to examine the peculiarities of the Bulgarian tax treatment of foreign-source dividends in favor of a natural person resident in Bulgaria.

In Bulgaria, from the point of view of tax due on receipt of a dividend, the dividend constitutes income subject to withholding tax.
This means that if a Bulgarian company pays a dividend to its owner or shareholders, the company itself should withhold tax and pay the dividend reduced by the relevant rate.

However, when a Bulgarian tax resident receives income from a dividend from abroad, the tax is no longer withholding tax, but final.
This means that the recipient (Bulgarian tax resident) of the dividend must calculate and pay the tax himself.

As mentioned in the introduction,  dividends  accrued to resident individuals are subject to taxation with  a final tax rate of 5% (5 percent)  already at the time of their accrual and are not subject to declaration in the annual tax return pursuant to Article 50 of the Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ) .

Dividends from foreign sources received by individuals who are tax residents of Bulgaria are an exception .
In this case, dividends are subject to declaration ( Article 52, paragraph 1, no. 4 of the Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ) , in conjunction with Article 50, paragraph 1, no. 3  ЗДДФЛ)).

In fact, if the distributing company and the beneficiary of the dividend are established in different countries, usually, both countries subject the dividends to taxation, in our case:

  1. The country in which the company distributing the dividend is established imposes withholding tax (withholding tax – see also section 3);
  2. Bulgaria , where the recipient of the dividend is established, imposes a final tax (окончателен данък).

To avoid double taxation (двойното данъчно облагане) two methods apply in Bulgaria:

  1. Ordinary tax credit method (методът на обикновения данъчен кредит) according to national legislation ( art. 76 of the Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ)
  2. Special rules regulated in Double Taxation Agreements (DTA)  – (
    See the list in: Bulgaria – Bilateral double taxation agreements on income

In this regard, we will clarify that when receiving dividends with a source abroad, the person should self-tax – pay a  final  tax of 5 percent  on their gross amount (Article 38, paragraph 1, item 2, b. “b ” and par. 2 of the Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ) , and Art. 46, par. 3 (ЗДДФЛ)).
The tax is due by the 15th day of the month following the quarter in which the dividends were acquired  (Article 67, paragraph 1 (ЗДДФЛ) , in conjunction with Article 46, paragraph 4 (ЗДДФЛ) ).

If the dividends are taxed abroad, the person may avoid their double taxation when:

  • There is no agreement available for the avoidance of double taxation (Double Taxation Agreement (DTA)  – облагане (СИДДО )  and the ordinary tax credit method is applied (методът на обикновения данъчен кредит) , i.e.  deduct the tax paid abroad up to the amount of tax due in Bulgaria (art. 76, par. 1-3 of the Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ)).
    To use the tax credit, it is necessary to submit to the National Revenue Agency a proof (document) of the withholding tax.
    “Tax credit” means that the tax paid abroad is deducted from the tax due in Bulgaria . In Bulgaria the rate of tax on dividends is always 5% (5 percent), from which it follows that:

    • If the tax paid abroad is higher than or equal to 5%, no tax is due in Bulgaria, but nothing is returned as “overpaid” abroad compared to the local rate.
    • If the tax paid abroad is less than 5%, only the balance up to 5% is paid in Bulgaria.

For example:

    • if abroad a 10% tax is withheld on the gross amount of dividends, the equivalent of which is BGN 1,000, tax of BGN 100, then no tax is due in Bulgaria, since the tax to be paid in Bulgaria on the same amount would be BGN 50;
    • if a 3% tax is withheld, i.e. BGN 30, the person must pay BGN 20 tax by the 15th of the month following the quarter in which the income was acquired;
  • a Double Taxation Agreement (DTA) is available  – (Procedure for avoiding double taxation under the DTA).
    In this case,  the relevant methods of avoiding double taxation set out in the relevant agreement must be applied (most commonly the ordinary tax credit method (method for avoiding double taxation under the DTA) , described above.

Double  Taxation Agreements (DTA) – (Спогодби за избягване на двойното данъчно облагане (СИДДО ) are applied with priority over the Personal Income Tax Act (ЗДДФЛ) . In the context of dividend tax this is practically irrelevant, since the Conventions between Bulgaria and third countries always provide for a tax credit for the tax paid on dividends.

The main advantage of treaties in the context of dividend tax is that treaties very often limit the ability of the other country to impose a withholding tax. This is done by imposing tax ceilings, which in the vast majority of cases are lower than the tax provided for by the local law of the respective country.

Consequentially:

  1. If the tax ceiling provided for by the Convention is lower than the effective tax in the country in question, the tax rate provided for by the Convention applies;
  2. If the tax ceiling provided for by the Convention is higher than the effective tax in the country in question, the effective tax applies;
  3. In Bulgaria the tax credit rule applies.

In most cases, the recipient of the dividend automatically exercises its rights under the agreement. It would only be necessary to notify the payer of the income, i.e. the company paying the dividend. Sometimes there is a special procedure for this. This is the example of the United States, where the IRS has a special form that is filled out by the recipient of the income: W-8 BEN.

Regardless of whether the  Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ) provides that the tax burden on foreign-sourced dividends is finally settled within the year,  such dividends should be declared for information purposes only in the annual tax return  pursuant to art. 50 of the Law on Income Taxes of Natural Persons – Закон за Данъците bърху Доходите на Физическите Лица (ЗДДФЛ) . The peculiarity is that  they are declared in the  declaration form 2001a  – for persons who received income/s from sources abroad (  Appendix No. 8 ). (In this sense is the  Clarification  (Разяснение )   No. 1_4 of 24.02.2011  of the  Directorate “Administration of Appeals and Enforcement”  (Обжалване и управление на изпълнението (ОУИ))  of Burgas  (Дирекция „ОУИ“ – Бургас) So a person who forms his income entirely from a source in Bulgaria, but has income from dividends with a source abroad, regardless of whether, for all his income, he fills out the  declaration form 2001a  (декларация образец 2001а) for those who have received income/s from foreign sources, finally indicating the income received from dividends from foreign sources in Part I of Appendix No. 8 for information purposes only  (as indicated at the beginning of the same Appendix No. 8, the data declared therein are not taken into account for tax purposes).

(1)  In the case of hidden distribution of profits, the taxable amount is determined on the gross amount of the amounts charged.

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