I. The representation costs from the perspective of the Bulgarian VAT Act

1. Which expenses are known as representation costs?
Art. 62, Para. 1 of the Regulation on the Implementation of the Value Added Tax Act () provides a legal definition for representation costs. According to this definition, representation costs are the expenses that serve for representative and entertainment purposes, for example:

• reception, stay and seeing off guests and delegations;
• accommodations;
• food and beverages consumption;
• organization of business meetings;
• celebrations, entertainment events;
• excursions.

Which means, that all the expenses related to the business activity of the Company, serving the needs of entertainment, for e.g. a business meal, could be considered as representation costs and recognized as business expenses.

The costs for organization of symposiums, congresses, conferences and other similar events, which are directly connected to presenting or testing the goods or services, provided by the person within the framework of his/her independent economic activity, should not be considered as representation costs. (Art. 62, Para. 2 of the Regulation on the Implementation of the Value Added Tax Act).

2. Is the tax recovery applicable for the representation costs?
The right of tax credit deduction shall not be available in case the goods or the services are designated for representative or entertaining purposes. (Art. 70, Para 1, It. 3) For this reason, the tax base of the representation costs also includes the corresponding VAT rate.

II. The representation costs from the perspective of the Bulgarian Corporate Income Tax Act

Within the provisions of the Corporate Income Taxation Act, the concept of representation costs is not clearly defined and with this regard, according to the Law on Legislation and the established tax theory and policy for the purposes of corporate taxation according, the definition of representation costs according to the Regulation on the Implementation of the Value Added Tax Act shall apply.

1. Recognition of the representative costs
In order for the deductibility of the representation, the following requirements shall be fulfilled:

• The costs shall be commercially viable - an essential condition for the recognition of expenses as such is the reliable determination of their relationship with the business of the enterprise; d. H. it is a current or future benefit for the company to prove.
• Proof of the operational reasoning according to Art. 10 of the Corporate Income Taxation Act - for tax purposes, an expense is only recognized as profit or loss upon proof by a primary posting voucher. For example, the recognition of an expense requires an invoice for it. For the representation costs, the law provides for an exception in that only the presentation of a cash register receipt (Article 10 (6)) is sufficient for recognition for tax purposes. So, for a business lunch, if you do not receive a bill from the restaurant, these expenses are deductible business expenses, provided that your business / professional cause can be proven.

2. Taxation of representation costs
Once representative expenses are recognized, they shall also be subject to a 10% tax on expenses at the end of the year. This tax is separate from the corporate tax, which is the same rate. Taxable persons are all persons who have accounted for representative expenses and are subject of paying of corporate tax. The tax base for determining the tax on representative expenses is the representative expenses accrued for the calendar year (VAT included). The tax shall be declared and paid no later than March 31 of the following year with an annual tax return according to Art. 92, Corporate Income Taxation Act.

3. What effect do taxes on representation costs have?
The representative costs, together with the tax due on them, reduce tax profit of the company and therefore corporate tax.

For a more detailed explanation of this, the following example shows that a company that did not have representation costs has a profit of 5,000 leva and has to pay corporation tax of 500 leva. However, if the company has recognized representative costs of 1,000 Leva, they must pay 100 leva in tax expense. In this way the company will reduce its tax profit by 1100 Leva (representative expenses + tax on expenses) and it will be to the amount of 3900 leva, after which it has to pay 390 leva corporate tax. Thus the total amount of taxes will be 490 leva, so the amount of the tax liability decreases.