With the even more rising popularity of freelancing we have been receiving many inquiries lately by self-employed specialists from the IT-sector, seeking advice on their relocation in Bulgaria. Why is that? We`ll try to explain that in short in the below article, which aims to present some of the advantages a freelancer can gain with taking up Bulgaria as his tax residence.
Freelancing has been gaining popularity constantly over the years due to the exponential growth of the digital market and the business related to it. Freelancers (also called “independent contractors”) do enjoy a certain freedom and especially such in the field of e-commerce, software design, coding etc. The Internet and the constant demand for specialists in the field has led to the formation of a certain community, that has the freedom to both operate freely, unbound by the traditional borders of a certain country, and to have a certain level of financial security – a combination that provokes such individuals to seek new ways for maximizing the results of their business and activities.
One of these ways is relocating. And we would like to point out some of the things that make Bulgaria a destination that should be quite interesting for a freelance specialist, provided we will be delving, much to our content, in the field of Information technology and the businesses around it.
First of all, Internet. Bulgaria is one of the top countries, especially in big cities, with regard to Internet speeds and infrastructure. For example, www.netindex.com shows an average broadband download for Sofia of 48.9 Mbps, whereas the average speeds for the G8 and EU are, respectively, 34.3 and 32.0 Mbps. Bloomberg.com did list Bulgaria at eighth place in its 2013 Top 10: Where to Find the World’s Fastest Internet. The process between signing your contract with an Internet provider and having Internet access at your home/office is usually really fast and service providers do tend to adhere to up-time industry standards for their services.
Secondly, Bulgaria is turning more and more attractive to foreign specialists due to the tax regulations in the country. Self-employed specialist, specifically specialists in the field of IT, are not overburdened with taxes and working as an independent contractor does not constitute the huge fiscal obligation as in other EU countries. To give an overview of the picture, let us just name the flat tax rate – the income tax for natural persons (e.g. self-employed specialists) is 10 per cent of the income as stipulated by the Income Taxes on Natural Persons Act (also abbreviated as PITA). This is a flat rate and is to the advantage of freelance specialists. On top of that flat rate, the taxable income originating from working as a freelance practitioner is lowered by 25% due to the so-called “operating expenses” before being charged with 10 %. Art. 29 of the PITA in its paragraph 2, letter “b” does go even further – operating expenses in the amount of 40% are subtracted from the taxable income for author’s and license remuneration. This would mean that the final tax can be based upon 6 % of the taxable income, provided the work can be considered a literary work (e.g. –computer programs are protected as literary works within the meaning of Article 2 of the Berne Convention, applicable worldwide and in Bulgaria as well) and the author thereof is the freelancer himself.
A prerequisite for being subject to Bulgarian tax regulations: registering with the Bulgarian BULSTAT-Register.
There are certain aspects to consider procedure wise when taking the decision to take advantage of Bulgaria as your tax residence. It is common practice that in order to be subject to the Bulgarian tax legislation one should be firstly considered a “local person”. This is a common legal term, which usually is abstractly defined and has its peculiarities when it comes to tax law. In its Art. 4 the Bulgarian PITA defines the term by a cascade of criteria, which are alternative. Without going into much detail, a person is considered a local person and subject to the Bulgarian Personal Income Tax Act when:
- One’s permanent place of residence is in Bulgaria, or
- One spends more than 183 days in each period of 12 consecutive months in Bulgaria, or
- One resides abroad on assignment of the Bulgarian State, its authorities and/or its organizations, or Bulgarian establishments, and the members of his/her family shall also be local natural persons, or
- One, who has his/hers centre of vital interests in Bulgaria.
Legal doctrine has been adamant that a term, such as “centre of vital interests” should always be defined abstractly and there is no single formula to give a straightforward hypothetical answer. The term is commonly defined in the so-called Tie-Breaker clauses in Tax treaties and has been included in Art. 4 of the OECD Model Convention and has been subject to many studies. The purpose of the current text is not to engage in a doctrinal debate and we would like to point, that usually, as in the Bulgarian PITA, the centre of vital interests is defined with the help of the following criteria: where one’s family and property is, the place, where one conducts his business/employment/other activities, the place, from which he “operates” with his property and assets. A brief moment is enough to deduce, that when it comes to freelancing the place where one conducts his services is more or less determined by the sole desire of the latter – a SEO-specialist need not go to the place where the server, holding the optimized site, is being physically kept. The place, from which the freelancer would be providing his services, is the place which he desires, say – Bulgaria.
Another viable option for foreign individuals that would like to operate as freelancers in Bulgaria is the incorporation of a company (a limited liability company, the Bulgarian version of which is the OOD), a separate judicial entity under which to undergo all business activities. The advantage of that option is that the liability is shifted towards the company and not the individual person. Also, when operating on a larger team and with other people, a limited liability company does provide the legal framework for the relations between the team members.
Why is Bulgaria a good destination for a new company? First of all, it is relatively easy to register a company. The minimum for share capital that needs to be paid up is as little as BGN 2 (ca 1 EUR), the procedure itself takes about 2-4 business days and could be done from distance. As a Member State of the European Union Bulgaria provides a stable legal framework for limited liability companies. The corporate tax is again as low as 10 per cent, being one of the lowest among European countries. Furthermore, the tax for distributed profit (from dividends or liquidation share) amounts to 5 per cent. It should be noted that for a shareholder to be considered a resident in Bulgaria for the purposes of taxation of his profits from owning a share at a company the same conditions apply – he should be a local person as stipulated in Art. 4 of the PITA. There are no major differences between the status of the shareholder as in comparison to the self-employed person with regard to when one is considered a local person. It is a matter of choice whether to organize your activity as a self-employed specialist or a limited liability company and the decision should always be based upon the individual facts and considering the advantages of both, whereby we would be glad to assist with providing legal and business counsel in order to aid you in making this choice.
Once the decision for relocating is met, certain formalities should be considered, for which legal counsel and guidance is strongly advisable. Relocating in Bulgaria means that one should apply for residence. EU-citizens and citizens of countries in the European Economic Area can stay up to three months without a residence permit, after that they should apply for long-term residence permit and apply for registration with the National Revenue Agency.
Last, but not least – living expenses and Bulgarian cities. It is worth noting that Bulgarian major cities, like Sofia, Plovdiv or Burgas offer not only reasonable lease prices for offices or housing, but also a growing and friendly environment of young specialists, more often than not – with international background, a vivid night life and a good cuisine – all the prerequisites for a pleasant occupation as a freelancer in Bulgaria.