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Bulgaria Freelance Taxes: Detailed Breakdown
This article is a living document; I try to update it as time goes. As of 2023, it is up to date
In the past few years I've been living in Bulgaria, working remotely as a software engineer (technically, “consultant”) for foreign companies (both European and US), and by now I have a pretty good idea about all the taxes and other business-related expenses one has to pay in this setup. Since it's ridiculously hard to find a good and detailed breakdown like that (most often you'll find that income tax is 10%, and dividend tax is 5%, which is accurate but awfully incomplete), I just decided to put this page together. After all, taxes here are pretty simple, unlike countries like US.
Note that what I'm going to be talking about is focused on this exact case: being a resident in Bulgaria, and working as a freelance software engineer (consultant) for companies outside of Bulgaria. So e.g. if your line of business is different (not considered consulting), or maybe you're not planning to be a resident here, then some rules will change and I don't know much details. Also note that this is not about employment. By “freelance” here I mean that I have some sort of Service Agreement with my clients, and I'm not an employee.
Bulgarian national currency is BGN, and as of now, its value is pegged to EUR with the fixed ratio of 1.95583. So, 1 EUR is 1.95583 BGN, and it doesn't change over time, at least not yet.
One more thing to mention explicitly before we start: this article is intended to help you with accurate estimations and planning, but it's by no means 100% precise, meaning, you can't rely on it for the actual accounting and tax reporting. It's only based on my personal experience paying taxes in Bulgaria. If you actually move to Bulgaria, get yourself an accountant before you start working.
Overall there are two options: either register a company, or register your business as an individual consultant (software engineering is generally considered “consulting”). I was doing both: I started by registering a company and worked like that for a few years, and at some point switched to being an individual instead.
If going with a company, there are more sub-options like whether one only gets dividends, or has a salary and maybe some bonuses from the company, but I was only doing the dividends, because, as per my accountant, it ends up being cheaper (although this is being countered by a HN user, who is saying: “Past a certain threshold, with a company, the best option is to pay yourself a salary every month”. Check this followup comment for more details. My math still doesn't show how this can be true unless you're making like 50K BGN monthly. And since I personally was only going the dividends way, this article only focuses on dividends, as long as a company is concerned)
A short summary of those options is: having a company is considerably less convenient and more burdensome; in my opinion, the only decent reason for going with a company is when your income is below certain threshold, because it's cheaper this way (or, well, if you don't plan to be a resident here but want to have your business registered in Bulgaria, then having a company is your only option, but as I said above, I personally don't have experience doing that and I don't know much details). Another reason to prefer working as a company is the limited liability, but I don't think it's much relevant for software engineers, because a reasonable Service Agreement with the clients shouldn't put a lot of liability on software engineers in the first place.
Also, keep in mind that those who are not EU citizens or permanent residents, pay a bit less business-related taxes due to health insurance: they pay other kind of health insurance, unrelated to income at all. Fyi in my case it was about 200 BGN per year (I was getting just some bare minimum required insurance), and since it's not a business-related expense, it's not included in the calculations below.
The TL;DR charts for both cases in 2023:
As you see, there is a tipping point where being a company stops being cheaper: in 2023, for EU citizens or permanent residents it's around 10000 BGN per month, for others it's around 7000 BGN.
Source code to generate those charts can be found on github.
Now, let's break it down.
One has to pay the following business-related expenses:
- Income tax. It's the same for companies and individuals: 10%, but it's calculated against profit, and what exactly is considered profit is different for companies and individuals. More on that later.
- Dividend tax. Obviously it's only relevant for companies, and it's 5%.
- Social security (in Bulgarian, “осигуровки”). Technically, the percentages are large, but there are a few important details outlined below, so don't be too afraid when you see the numbers. The percentages are as follows: “ДОО” (State Social Insurance): 14.8%, plus “ДЗПО” (Additional Mandatory Pension Insurance) 5%, plus if you are an EU citizen or you have a permanent residence permit here, then also “НЗОК” (National Health Insurance Fund): 8%. And the two important details are:
- First, the amount from which those percentages are taken, is limited: there is minimal social security income (“минимален осигурителен доход”), and therefore maximal social security income (“максимален осигурителен доход”). Those numbers change (go up) nearly every year, and since Apr 1, 2023, they are 710 BGN and 3400 BGN respectively. So if your income is larger than 3400 BGN (doesn't matter how much larger), then all those social security percentages (14.8% + 5% + in certain cases 8%) are only taken from 3400 BGN. And if your income is smaller than 710 BGN, even if it's straight zero, then you'll have to pay social security as if your income was 710 BGN. And again, those exact thresholds are subject to change nearly every year.
- Second, what matters for those social security percentages is the income of an individual. Your company's income (if you decide to register a company) doesn't really matter here. Only the income of you as an individual matters. More on that later.
- Accountant fees: about 200 - 500 BGN per month independently of the income (yeah that's quite a range, in Sofia I've seen someone taking 500 BGN monthly, but depending on the city, it's possible to find one for about 200 BGN per month)
- Very minor, but for completeness also let's include bank fees here: assuming you'll need 2 accounts (one in USD or EUR to receive your income directly from your clients, and another one in BGN to pay the taxes and other Bulgarian expenses), for the company it's around 20 - 25 BGN per month, and for an individual it's 5 - 10 BGN.
Now, let's take a closer look at each of the two major options (company vs individual).
Working as a company
If you're working as a company, when you just received money from your clients, obviously it's not possible to simply start spending them on your personal things, since it's not your money. So first of all you need to come up with a plan on how to be making them your money. The approach that I was using is this: just wait for the end of year and then distribute dividends, and if I need money sooner than that, then make a loan from the company to myself (I'll explain more details about the loan below). It sucks to not have my personal money without having to do extra paperwork (to make a loan), but it's the cheapest way, so that's what I was doing.
Another option is to hire yourself, and pay yourself some monthly salary plus optionally bonuses: this way, you'll get your personal money every month, but it's a more expensive option so it defeats the purpose of working as a company in the first place. I'm not going into details about this option to hire yourself since I wasn't doing it personally and I'm not very familiar with all the subtleties. So, in the examples below I'll only be using the first option (dividends and, when necessary, loans).
UPDATE 2023: it might actually be possible to get money sooner without a loan: my accountant incidentally told me that since 2023, it's now possible to distribute dividends in advance, before the fiscal year ends. However, by that time I was working as an individual already, and so I never tried it out personally and I don't know any details of how exactly it works. But keep that in mind, and if you decide to work as a company, definitely talk about it with your accountant; it sounds better than making a loan.
Example calculations of net income
Let's assume our gross income is 10000 BGN.
As mentioned above, income tax is calculated against profit (that is, all incomes minus all expenses). However, when using a company just as a legal front for freelancing, the company's expenses are very small: only accountant and bank fees, so the tax is applied almost to the full received amount.
- First, calculate social security. As mentioned before, what matters for social security is the income of an individual; and since I do not hire myself, and don't have a salary or any other bonuses from the company, my income as an individual is zero. Therefore, social security is taken from the minimal amount (710 BGN in 2023), and the calculation is as follows: 710 * (0.148+0.05) = 140.58 BGN. Note that we didn't include the health insurance here; if you are an EU citizen or a permanent resident, you'll need to add 8% more here.
- Calculate tax base: deduct the expenses (assuming those are 250 BGN for the accountant, and 25 BGN for the bank), and also deduct the social security we calculated above: 10000 - 250 - 25 - 140.58 = 9584.42 BGN.
- Calculate income tax: 9584.42 * 0.10 = 958.44 BGN
- So the amount left on the company is: 10000 - 140.58 - 250 - 25 - 958.44 = 8625.98 BGN
- Deduct 5% dividend tax: 8625.98 * 0.95 = 8194.68 BGN
So from the gross 10000 BGN we got net 8194.68 BGN, which means we had to pay about 18.05% of taxes and other expenses.
Loans slightly reduce net income as well
NOTE: as mentioned above, apparently since 2023 it's possible to distribute dividends in advance, before the fiscal year ends; I never tried it, but if it actually works, then making loans like that might not be necessary anymore. Regardless, I'll leave this section as is, just in case.
The above calculations don't account for loans, so they assume you'd just keep your money on the company's account, and only get your dividends in the beginning of the next year. If you do need to get some money earlier though (which I think is common), then the loan will also reduce your net income, but not by much. E.g. I was lending money from my company to myself for 4% per year, therefore when the loan is liquidated in the end of the year, technically my company was making another small profit from those extra 4% that I pay back to it, and therefore this profit is taxable in the same way (10% income tax plus 5% dividend tax from the remainder, so in total it's 14.5% from those 4%, i.e. 0.04 * 0.145 = 0.58% per year).
So, in total, if e.g. I borrowed 50 000 BGN at July 01 (therefore I'll have to keep it for exactly half a year, paying extra 4%/2 = 2% of it back to the company), I'd additionally lose 50000 * (0.04/2) * 0.145 = 145 BGN, so for holding this loan for half a year, I lost 0.29% of its amount. Not very significant.
Working as an individual freelancer
First of all, let me clarify what exactly I mean by “individual freelancer”, since some readers were confused after talking to lawyers and accountants. There are technically multiple ways an individual can do business without registering a company, but I mean exactly freelance (in Bulgarian, свободна професия).
Not “Sole Proprietor” (in Bulgarian, едноличен търговец). No. Sole proprietors are taxed very differently and I don't think it's a good fit for software engineers and other consultants. And not “EOOD”, which just means a company with a single founder. What I'm talking about is exactly freelance (свободна професия). You might want to copy paste it to a lawyer and/or accountant that you'll be working with, to avoid any misunderstandings.
Alright, having that said, let's move on to the tax details.
As I briefly mentioned above, what is considered profit is different for companies and individuals. For companies it's easy: all incomes minus all expenses, since company must have dedicated bank accounts etc, but for individuals it'd be much harder to calculate reliably, since it's not too clear which individual's expenses are related to business and which aren't. So for individuals, government uses a simple model and introduces so called recognized expenses (in Bulgarian, “признати разходи”), which is a fixed percentage of the income. For different lines of business this fixed percentage is different, but for consultants, it's 25%. What it means is: government just assumes (recognizes) that, no matter how large my income is, I always pay 25% of it as expenses, and so the remaining 75% is now considered profit, and all the taxes calculated from those 75%. And it's pretty cool because, as you remember from the section above, the actual business-related expenses in our case are much lower than that. Effectively, the income tax becomes closer to 7.5%. And the social security which we have to pay reduces the tax base even more.
Example calculations of net income
Again, assuming our gross income is 10000 BGN:
- First, calculate social security. Now that the income is related to the individual, we need to look at the actual income amount, and since it's above the maximum (3400 BGN in 2023), we'll use 3400 BGN. Calculated as follows: 3400*(0.148+0.05) = 673.2 BGN. Note that we didn't include the health insurance here; if you are an EU citizen or a permanent resident, you'll need to add 8% more here.
- Calculate tax base: deduct the recognized expenses 25%, and also deduct the social security we calculated above: 10000 - 10000*0.25 - 673.2 = 6826.80 BGN.
- Income tax is 10% of the tax base, which is 6826.80 * 0.10 = 682.68 BGN.
- Fixed expenses as usual: accountant fee 250 BGN, bank fee 10 BGN, so it's 260 BGN.
- Therefore net income is: 10000 - 673.2 - 682.68 - 260 = 8384.12 BGN
So from the gross 10000 BGN we got net 8384.12 BGN, which means we had to pay about 16.2% of taxes and other expenses.
Taxation of stock options
This is kind of a bonus section in this article, as it is only mildly related, and my experience is even more limited in this area. Nevertheless, in case it's useful to someone, here it is.
Stock options are an increasingly popular “extra” part of the compensation package, especially in the tech industry. I'm not going into fine details as to how stock options work in general: there are a lot of existing sources out there which explain it better than I could; but shortly, stock options are the right (not the obligation) to purchase certain amount of stock shares, on a fixed price (so called strike price), within a limited amount of time. The most appealing part here is the strike price: once you get your options with strike price e.g. 5 USD, you can purchase shares on 5 USD each, regardless of what the current market price for those shares is. So if the market value is e.g. 50 USD, you could buy shares for 5 USD and immediately sell them for 50 USD, thus making an instant 10x profit. That's the idea anyway.
Generally when you have stock options, there are 3 possible events related to them:
- Vesting: You get a new portion of options vested (meaning, you can now exercise them). The schedule at which this happens totally depends on the company, but a common case is to have them vested every month (typically after the initial “cliff” of e.g. 6 months);
- Exercise: You exercise some of your options (meaning, you buy shares using your options strike price, which is supposedly lower than the current market value);
- Sale: You sell some of your shares.
To my knowledge, Vesting is not a taxable even in any of the countries I'm familiar with (as per freelancers from many countries that I happened to talk to).
The Sale is obviously a taxable event: you sell shares and potentially get some taxable profit (however there are a few countries where even Sale part is not taxable; from what I know, Arab Emirates is one such country).
Now this gray area, Exercise, is an interesting part. In a lot of countries (at least in USA and majority of Europe), Exercise is a taxable event too: whenever you exercise options, they see it as if you made profit since you bought shares on a discount, and you pay the tax on that discount value (current market value minus the strike price you paid). To me, it's highly annoying and doesn't make sense: first of all, when I'm purchasing a stock, nobody knows if I'll make a profit or a loss in the end. So effectively I'm paying tax on an unrealized profit. Also, paying the tax upfront means having to have cash not only to do the actual exercise (pay for the shares), but also find extra cash to pay the taxes. And if we're talking about stock of a private company, selling shares (e.g. to get some cash for taxes) might not be an easy task at all. In certain cases one might need a lot more cash to pay the post-Exercise taxes than to pay for the actual shares. So overall, to me that practice to treat Exercise as a taxable event doesn't make any sense, yet this is how majority of countries treat them.
In Bulgaria though, things might not be as bad for you. I say “might” because it depends on a bunch of details in every particular case, and I'm not familiar with all the possible cases, but at least let me share what I do know.
So from what I know from the lawyer I spoke to, when you buy shares by exercising options (using your strike price), there are two possible ways it could be done by the options-issuing company:
- The company pays the remainder of the current market price for you to purchase the shares in the market (it can only be the case when the company is public and is being traded on a regulated exchange). In this case, this remainder amount that the company pays on your behalf, is treated as your regular income for consulting, so yeah Exercise is a taxable event in this case, but at least a bit of good news is that the same “recognized expenses” take effect and your tax is evectively 7.5% of that remainder. The share purchase price is considered to be the current market price (so not the price you actually paid, but higher); it will be important later on when you sell shares.
- The company just gives shares to you in any other way, without explicitly paying any remainder on your behalf (and if the company is private, that's the only way). In this case, it's not a taxable event: it's treated as if you just bought your shares on this low price, so the share purchase price is the actual strike price you paid.
Then later on, when you finally sell your shares (which might be right after the purchase or 30 years later, doesn't matter), the difference between sale price and the purchase price is considered your profit, and if it's positive, you'll have to pay 10% tax after the sale.
So as you see, depending on circumstances, Exercise could be considered a taxable event in Bulgaria, but it's often not. Since those stock options are still a relatively rare occurrence here in Bulgaria, better check with the lawyer about your particular situation, to make sure (see the small section on accountants and lawyers below).
Other small expenses
While the calculations above provide a very good estimation, there might be other small expenses, like those:
- Unless you receive payments in EUR from another European country, banks usually take a small percentage for the incoming wire transfers, like 0.1%;
- Accountants may charge something extra once in a while, like 150 BGN once a year to put together an annual report of some sort;
- As mentioned above, when working as a company, loans will also somewhat reduce your net.
Rate of BGN to other currencies
For every incoming payment from your clients (or any other taxable event, really), what matters for taxes is the amount in BGN. If you get paid in EUR, that's easy, because as mentioned above, BGN is pegged to EUR with a fixed rate of 1.95583, so this exact rate is used all the time. However if you receive e.g. USD, we need to figure which rate to use for every particular payment. Two key points here:
- For every working day, Bulgarian National Bank ( https://www.bnb.bg/ ) publishes its official rates of foreign currencies to BGN. Historical values are also available. This official rate is fixed for the whole day. If some particular day is a holiday, the rate from the last working day prior to the holiday should be used.
- What matters for your income is the date and amount in your invoice, not the date of actually receiving the payment, and the actual amount received (which might be a bit smaller due to whatever fees the banks take).
As an example: 23.07.2021 you created an invoice for 10000 USD, and then a few days later, 27.07.2021 you actually got the payment for 9990 USD (after bank fees). In this case, the amount used for income calculations should be 10000 USD, and the USD-BGN rate should be taken for the 23.07.2021, which is 1.66213. So for tax purposes, this income is considered 10000 * 1.66213 = 16621.30 BGN.
Freelance tax is paid every quarter
Most taxes in Bulgaria are only paid once per year, but for some reason (I've no idea why, really), freelance taxes must be paid every quarter instead (so called advance tax, or “авансов данък” in Bulgarian). So if you decide to go the freelance route (i.e. without registering a company), a simplified tax schedule will be as follows:
- For profit received Jan-Mar, tax must be paid until Apr 30;
- For profit received Apr-Jun, tax must be paid until Jul 31;
- For profit received Jul-Sep, tax must be paid until Oct 31;
- For profit received Oct-Dec, tax must be paid until Apr 30 of the next year (but if you pay it until May 31, you'll use 5% discount on the taxes)
Working as an individual requires somewhat lighter paperwork than companies.
Opening a company using an accountant will cost you about 300-400 BGN (or about twice as less if you want to do it yourself), and then if you decide to close it, it's a long process which lasts about 6 months and costs twice as much as the opening.
For individuals it's a lot cheaper, both opening and closing, but opening requires an education document translated to Bulgarian. This kind of translation will cost you perhaps 30-40 BGN and a few days of waiting; after that's done, you just go to the Registry Agency (Агенция по Вписванията), pay 10 BGN fee, and you get registered same day. Closing is equally easy.
In either case (company or individual), you might also need to do the VAT registration. As per my limited experience, VAT registration is required by law if (a) your clients are EU-based, or (b) your turnover during the last 12 months is more than
50 000 BGN (100 000 BGN since 2023). Doing this registration with the help of your accountant is something like 150 - 300 BGN once. And also, to make it clear, being VAT-registered does not mean that you'd have to charge VAT. As per my accountant, for our line of business, at least in my exact case, I don't need to charge any VAT.
Once the initial paperwork is done, every month you'll need to download bank statements (online), and send them to your accountant, together with the invoices for this month.
Also at some point you might need to translate your Service Agreement with your clients to Bulgarian, but not necessarily, it depends.
That's about it. Not too much really.
How company is more burdensome
So apart from the difference in taxes:
- The most annoying issue is that the money I receive is not my money. I might want to use them for investments or buy other things, and I can't do that without making a loan first, which means more paperwork and slightly more taxes.
- It's just an extra thing to think of and maintain. Separate accounting, separate possessions, not too easy to get rid of later on, etc etc.
Historical values of min and max social security base
Just in case you're interested:
- 2023 since August 1: min 780 BGN, max 3400 BGN
- 2023: min 710 BGN, max 3400 BGN
- 2022 since April 1: min 710 BGN, max 3400 BGN
- 2022 until April 1: min 650 BGN, max 3000 BGN
- 2021: min 650 BGN, max 3000 BGN
- 2020: min 610 BGN, max 3000 BGN
- 2019: min 560 BGN, max 3000 BGN
- 2018: min 510 BGN, max 2600 BGN
- 2017: min 460 BGN, max 2600 BGN
- 2016: min 420 BGN, max 2600 BGN
The min social security base is usually the same as the minimal salary, and you can see more historical data there: https://kik-info.com/spravochnik/mrz.php
Get an accountant
And finally, let me reemphasize again that this info is only intended for a reasonably accurate estimation and planning; it's not enough for the actual accounting and tax reporting. If you actually move to Bulgaria, get yourself an accountant. If you're trying to find one, it might be a good start to talk to Hristo Marinov: even though I personally don't have a long track record of working with him yet, I recommend him here because he's definitely on the same page re: freelance accounting (and as you can find out from the comments below, unfortunately there is a lot of confusion among accountants when it comes to freelancing, like when people are told they need to register as a Sole Trader, which is total nonsense for our use case), and he also speaks English and can work with clients from any part of Bulgaria.
And if your situation is not very straightforward (e.g. involves stock options, as discussed above), I'd also recommend talking to a lawyer first. I had a chance to speak with a number of lawyers at this point, and I found those guys to be the most helpful for freelance-related cases, as well as for cases involving trading stocks and other types of assets: www.taxmonkey.bg/en/home/ (fwiw I'm not paid by them to advertise them here, just genuinely like their services)
Taxes in Bulgaria, while not being the lowest in the world, are still pretty low. However if you're considering moving here, taxes should probably not be the only reason, as there are plenty of other things to consider. My own primary reasons to move here back in the day had little to do with the taxes, actually.
So, do your own research. I like a lot of things about Bulgaria, despite the fact that many locals tend to hate it, but it's definitely not for everyone.
Discuss on Hacker News.