With the stiff competition in the global talent market, organizations are forced to expand their search horizons and explore under-tapped talent pools by wiping out territorial boundaries and moving toward more inclusive hiring.
Bulgaria has become an attractive destination for investors and organizations worldwide with its blooming IT labor market and favorable tax incentives for software developers.
On top of its excessive talent pool and well-developed IT infrastructure, Bulgaria also offers a number of different tax incentives for software developers. But, as we all know, taxes can get complicated. It’s hard to stay on track with all the latest amendments made to the tax law, especially with all the different resources out there.
That’s why we’ve prepared this short guide to lay the foundation of your knowledge of taxes in Bulgaria, mainly focusing on the tax incentives for software developers.
How the tax regime works
Personal income tax
Taxation of personal income is governed by the Personal Income Tax Act (PITA).
According to the PITA, taxable persons are considered the following:
- Local physical persons -> taxed on income from sources located in Bulgaria and abroad;
- Foreign physical persons -> taxed on income solely from sources in Bulgaria;
- Local and foreign persons required to withhold under the PITA.
The types of taxes on personal income include:
- Tax rate of 15% on the yearly tax base
This tax is imposed on the income of a business that operates as a sole trader and on the income of physical persons registered as tobacco growers or farmers (taxed similarly to sole traders).
- Tax rate of 10% on the total annual tax base
This tax is imposed on the income of business activities (trade, a profession, etc.); employment income from the transfer of property or rights; income from other sources.
- Final tax at the rate of 5%, 7%, or 10%.
The final tax is imposed on certain types of income received by the local physical persons as well as income of foreign persons from sources in Bulgaria.
In general, individuals residing in Bulgaria are subject to a fixed personal income tax rate of 10%. A tax rate of 7% is applicable to income on long-term life insurance contracts with terms of 15 years or more. In comparison, the tax rate of 5% applies to the income from shares and dividends.
The tax treatment of the software development sector is a little different.
One of the tax incentives developers can benefit from is the taxation of their income (author’s rights and licenses) at 5%, which is considerably lower compared with the standard rate of 10% on all other types of income.
The type of income referred to here is any payment received for the use or the right to use of the author’s rights and licenses, including, but not limited to, copyrights, patents, and industrial, scientific, or commercial equipment. Software development is also included in this definition.
!Exception – payments received from licenses that allow using a copy of the software without the right to copy, modify, distribute, publicly perform or exploit the software for commercial purposes are not considered as payments from author’s rights and licenses.
The basis of taxation for this type of income is determined by subtracting the operating expenses recognized by the statute from the generated income by 40% with the insurance contributions paid.
It’s important to note that no other expenses can be deducted from this income category. The right to deduct statutory expenses of 40% is exclusive to individuals who aren’t traders, according to Bulgarian commercial law.
Corporate income tax
Bulgaria also has one of the lowest corporate tax rates in the European Union, which is 10% (regulated by the Corporate Income Tax Act (CITA)). The tax base for the calculation of the corporate tax is the tax profit.
A relatively low corporate tax encourages a flow of foreign investments into the country, making Bulgaria an attractive location for businesses worldwide.
Avoidance of double taxation
In case provisions of a tax treaty or another international agreement ratified by Bulgaria differ from the provisions of the CITA, the provisions of the relevant tax treaty or agreement shall be applied.
When the provisions of the international treaty aren’t applied, taxable individuals are entitled to a tax credit under the provisions of the CITL for the taxes paid abroad.
The tax credit is calculated for each country and income type separately, limited to the amount of the Bulgarian tax on such income or profits.
For more information regarding double taxation in Bulgaria, please visit this page.
Tax incentives for software developers are important for the IT industry’s growth
Bulgaria has one of the lowest personal income and corporate taxes in the European Union, becoming an attractive location for businesses worldwide. With high-skilled workforce and favorable business conditions, it offers great opportunities in the field of software development.
IT industry is growing rapidly in Bulgaria, opening doors to new opportunities, and wiping out territorial boundaries. To maintain that growth, however, there are some necessary components that need to be taken into account.
One of those key components is talent.
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