How to Pay Dividends in Bulgaria: A Tax Guide for Business Owners

Paying dividends is a common way for Bulgarian companies to distribute profits to their shareholders. The rules are relatively straightforward, but they require attention to detail, especially when it comes to taxation and deadlines. This guide covers the essentials for business owners.

Who Can Receive Dividends?

Dividends can be paid to individuals or companies, whether they are Bulgarian residents or non-residents. The tax treatment depends on the recipient's status, so it is important to classify correctly from the start.

Tax Rates on Dividends

For Bulgarian resident individuals, dividend income is subject to a flat tax of 5%. No social security contributions are due on dividends, making them an efficient way to extract profits compared to salary.

Bulgarian resident companies receiving dividends may benefit from an exemption. If the distributing company is a Bulgarian resident or a resident of another EU/EEA member state, the dividends are generally not included in the recipient's taxable income, provided certain holding requirements are met.

Non-resident recipients are subject to a withholding tax of 5%, unless a double tax treaty between Bulgaria and their country of residence provides for a lower rate.

Withholding and Reporting

The company distributing the dividends acts as a withholding agent. It must deduct the applicable tax and remit it to the National Revenue Agency (NRA) by the end of the month following the quarter in which the dividend was declared.

Individuals who receive dividends must declare them in their annual tax return. The deadline for filing is typically 30 April of the following year, but you should check the latest NRA guidance.

Timing and Documentation

Dividends are usually paid after the approval of the annual financial statements and a formal decision by the general meeting of shareholders. Minutes of the meeting should be kept as evidence of the decision.

For dividends paid in kind rather than cash, specific valuation rules apply. It is advisable to obtain an independent valuation to avoid disputes with the tax authorities.

Common Pitfalls

Failure to withhold the correct tax can lead to penalties and interest. Misclassifying dividends as salary to avoid social security contributions is illegal and can trigger audits.

Transfer pricing rules may apply if dividends are paid to related parties in a way that does not reflect market conditions. Always document the commercial rationale for the payment.

Paying dividends in Bulgaria is a manageable process if you follow the rules. Given the potential consequences of errors, consulting a local tax advisor is strongly recommended.