Profit distribution
 

What are the profit distribution rules for companies?

According to the Bulgarian legislation companies that have reported accounting profit after tax are allowed to make a resolution to distribute profits and pay dividends to their partner/owner. Unlike other countries the Bulgarian legislation does not provide for preliminary dividend distribution.

The procedure for the formation and distribution of the profit is stipulated in the Commerce Act (CA). The divided distribution rules differ depending on the legal form of the respective company.

Joint-stock companies may distribute profit only, if:

  • They have reported accounting profit during the past calendar year and this is included in the annual financial statements which are approved by the company’s General Assembly; and
  • The net value of the company’s property (total assets – total liabilities), less the profit which is to be paid, exceeds the registered capital of the company, increased with the Reserves Fund on the company’s balance sheet.

Joint-stock companies are obliged by law to set aside 1/10 of the profit to Reserves Fund until the Reserves Fund reaches 1/10 of the company’s registered capital.

If these preconditions are met, the General Assembly of the respective joint-stock company may take a decision to distribute and pay dividend and may task its Management Board or Board of Directors (depending on the governance form) to pay the profit distributed to the respective shareholders depending on their rights.

Limited liability companies have the right to distribute profit, if:

  • During the past calendar year they have reported an accounting profit and this is included in the annual financial statements which are approved by the company’s General Assembly; and
  • The net value of the company’s property (total assets – total liabilities), less the profit to be paid out exceeds the company’s registered capital.

Limited liability companies are not obliged by law to set aside Reserves Fund. Such obligation may be stipulated by the partners in the partnership agreement. In this case the rules applicable to joint-stock companies or the rules explicitly envisaged in the partnership agreement apply.

If these preconditions are in met, the General Assembly of the respective Limited liability company may take a decision to distribute and pay dividend and may task the company’s general manager to pay the profit distributed to the respective partners.

Sole proprietors (SP) – SPs are natural persons carrying out business activities personally, not through a specific company. Unlike partners in companies and their companies, SPs do not give rise to relations between two different legal subjects. Therefore, SPs do not distribute profit, and the profit they report during the calendar year represents their income.

This income is part of the annual income of the respective natural person and it is included in the personal annual tax return, which is filed by 31 April of the year, following the year for which it relates to.

The tax base is determined under the rules set out in Corporate Income Tax Act (CITA), i.e. the income for the year is reduced by the expenses for the year and the accounting profit is calculated. The rule that not all income and expenses are recognised for tax purposes is also valid here. The tax rate applicable to the income generated from the activity of the sole proprietor is 15%, not 10%.

 

What are the taxes due upon profit distribution?

The distribution of profit (dividend) gives rise to an obligation to withhold and pay dividend tax.

According to art. 194 of CITA and art. 38 of Personal Income Tax Act (PITA) dividends are subject to final tax when distributed by Bulgarian companies in favour of:

  • Foreign companies (except the companies domiciled in the EU or the European Economic Area (EEA)); and
  • Bulgarian  or foreign  natural persons.

If a Bulgarian company distributes profit to another Bulgarian company or foreign company, which is domiciled in the European Union or in the EEA, the Bulgarian company is not obliged to withhold and pay dividend tax.

 

Important to know
Important to know

The tax base is the gross amount of the dividends distributed. The tax rate is 5%.

 

The tax is withheld by the company distributing the profit and is declared and paid to the accounts of the National Revenue Agency (NRA) by the end of the month following the quarter during which the decision to pay dividends was taken by the company’s General Assembly. They do not have to be actually paid by the company’s General Manager.

The return is filed with the territorial directorate of the NRA by registration of the payer of the income.

 

For more information
For more information

Additional information regarding the declaration and payment of corporate tax and filing of the ATR is available:

  • In the Commerce Act;
  • On the website of the NRA.
 
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