The taxable result is based on the statutory accounting principles relating to profit/loss and adjusted for tax purposes. Statutory accounting is maintained on an accrual basis in line with the applicable accounting standards.
Small and medium-sized companies may apply specific national standards for the financial statements of small and medium-sized companies or, optionally, International Financial Reporting Standards (IFRS). The principles provided by the standards for the financial statements of small and medium-sized companies are similar to those provided by IFRS. Certain types of companies, including banks and insurance companies, are obligated to apply IFRS.
The tax legislation follows the accounting rules for inventory valuation methods. The accounting rules may restrict the application of certain methods (e.g. last in first out [LIFO] is not allowed under IFRS).
Inventory valuation and revaluation methods applicable under accounting standards may be used for tax purposes. Companies may choose the method of inventory valuation but must apply the chosen method consistently throughout the accounting period. An inventory of assets and liabilities is carried out in each accounting period. Accounting gains and losses realised upon revaluation of inventory will not be recognised for tax purposes and will form a temporary tax difference. These gains and losses will be recognised for tax purposes in the period in which the inventory is disposed of.
Realised capital gains are included in corporate income and are taxed at the full CIT rate.
Capital gains from trade in listed securities (shares, tradable rights) on regulated markets in the European Union / European Economic Area (EEA) are not subject to taxation. As of 1 January 2021, the same tax treatment is extended to transactions carried out on equivalent markets outside the European Union as specified in the legislation.
Assets distributed as dividends are deemed realised at market value, and any capital gains arising from this will be subject to tax.
Dividends distributed by Bulgarian companies to foreign shareholders and resident individuals are subject to 5% WHT under the domestic legislation (see the Withholding taxes section for exceptions for payments to EU/EEA tax residents and under double tax treaties [DTTs]).
Inter-company dividend payments between Bulgarian companies and dividends distributed by EU/EEA residents to Bulgarian companies (except for dividends from special purpose investment companies or in case of ‘hidden distribution of profits’) are not included in the tax base of the recipient company.
Dividends distributed to a Bulgarian company by its EU or EEA subsidiary are exempt from CIT only if the distribution is not treated as a tax-deductible expense by the distributing company.
No explicit regulation with respect to stock dividends exists in the Bulgarian CIT Act. Rather, the tax treatment of stock dividends follows the accounting treatment.
Interest income is included in the financial results of the company and is subject to 10% CIT.
Royalty income is included in the financial results of the company and is subject to 10% CIT.
Exchange rate gains/losses
Exchange rate gains and losses are reported in the profit and loss account and reflected in the assessment of taxable profit.
Income derived outside Bulgaria by resident legal entities is included in the taxable base for the purpose of CIT, regardless of whether such income is subject to taxation abroad.
In instances where the provisions of a DTT are applicable, a tax credit or exemption for the foreign tax paid may be allowed. There is also a unilateral tax credit that may not exceed the amount of the tax that would be payable in Bulgaria for the same type of income.
Undistributed income of foreign subsidiaries of a Bulgarian resident company may be taxed, subject to the controlled foreign company (CFC) rules (for more details, please see the Group taxation section).