This article will provide an overview of the individual income from financial instruments and its taxation under the Bulgarian Value Added Tax Act (the VAT Act), the Corporate Income Taxation Act (CITA) and the Income Taxes on Natural Persons Act (ITNPA) depending on the recipient of the income, whether a natural person or a legal entity. Financial instruments, as defined in the Markets in Financial Instruments Act, are securities and other instruments that differentiate from securities, such as money market instruments, units in undertaking for collective investment, options, futures, swaps, forward rate agreements and other derivative instruments.
I. Taxation of natural persons’ income from financial instruments
All natural persons’ income, as described below, shall be declared in the annual tax return pursuant to Article 50 of the Income Taxes on Natural Persons Act (ITNPA) until 30th of April of the year following the year of receiving the income. The deadlines for the payment of the tax in respect of the above-mentioned income are the same as the deadlines for submitting the annual tax return.
Under certain circumstances, the income mentioned below may also be subject to the right to deduct VAT paid abroad, so that it is only to be declared in Bulgaria but not to be taxed. The right to use a tax credit depends on the nature of the income, the state in which it is generated and the provisions of the Treaty for avoidance of double taxation concluded between the state concerned and Bulgaria on such an option and the corresponding conditions.
It is important to note that income from transactions in financial instruments admitted to trading on a regulated market and to public offer in the state, in another Member State of the European Union or Contracting State of the European Economic Area Agreement are considered non-taxable within the meaning of the ITNPA (Art. 13 (1) No. 3 ITNPA). The taxation of investment trading which is excluded from the tax exemption includes:
1. Income from trading in shares
According to Article 33 (3) of the ITNPA, the taxable income shall be equal to the aggregate of the profit realized during the year under each specific transaction decreased by the amount of the losses realized during the year under each specific transaction. This means that each share transaction shall be listed separately on the tax return, but no tax is to be paid if the loss exceeds the persons’ profit.
The result of a share transaction is assessed as the positive difference between the sale price and the purchase price and is taxed at a rate of 10% (Art. 33 (4) of the ITNPA).
No taxable expenses are included for these transactions.
With this regard, it is important to note that the purchase price of the shares has to be proven with relevant documents (Art. 33 (5) of the ITNPA). Otherwise, it is set at rate zero and the entire selling price is taxed.
The Bulgarian National Revenue Agency shall be informed of the transfer date, the purchase and sale price and the name and identification number of the payer, if they are registered according to the Bulgarian law.
Individuals who own shares abroad shall declare them in their annual tax return pursuant to Art. 50 (1) (4) of the ITNPA.
2. Income from trading with bonds
The income from trading with bonds is taxed in a similar way to the income from trading with shares. The result of each transaction is evaluated as the positive difference between the sale price and the purchase price of the bonds and is taxed at a rate of 10%. The purchase price shall also be proven with documents, otherwise it is set at zero value. All transactions are to be listed separately, but losses and profits are subject to deduction. In this case, the law does not provide for any taxable expenses.
The information to be reported to the NRA is the same as for share trading. It is important to note that the loss from trading in bonds may be deducted from the profit from trading in shares and vice versa.
3. Income from trading with other financial instruments (compensation instruments, investment bonds, etc.)
The taxable income is calculated in the same way for all financial instruments, i. e. the positive difference between the sale price and the purchase price is taxed at the rate of 10%. The special rules applicable for trading with shares and bonds also apply here.
It should be noted that the ownership of options itself is not a reason for taxation and/or reporting of circumstances to the NRA. Taxation of options comes into force only when transactions are carried out.
4. Foreign exchange earnings (Forex)
A common form of income is that from foreign exchange trading, also known as “Forex”
Foreign exchange income is also taxed at the rate of 10%. Only the positive difference between the selling price and the purchase price is subject to taxation. If the purchase price cannot be proven with documents, it is set at zero value and taxed on the total amount received from the sale.
The Forex loss may be deducted from the Forex profit as well as the profit from trading in financial instruments (shares, bonds, etc. and vice versa, the loss from trading in financial instruments may be deducted from Forex trading).
Expenditure on foreign exchange trading is not tax deductible.
The tax office shall be informed of the date of transfer, the purchase and sale price and the payer of the income, if they are registered according to the Bulgarian law.
II. Taxation of the income of legal entities from shares and other financial instruments (CITA)
The main difference between the taxation of natural persons and legal entities is that legal entities are obliged to declare all expenses and are therefore entitled to deduct them from their income, and natural persons are not allowed to deduct expenses or to deduct them only to the extent provided for by law.
Taxation of income from trading in shares, bonds and other financial instruments and other foreign exchange by legal entities is no different from the taxation of their other profits – profits are subject to 10% corporate tax.
Similar to natural persons, the exemption applies to tax-exempt gains and non-recognized losses, i. e. gains and losses arising from transactions in financial instruments admitted to trading on a regulated market and offered to the public in the state, in another Member State of the European Union or Contracting State of the European Economic Area Agreement (Art. 44 CITA).
Profits from transactions in financial instruments admitted to trading on a regulated market and to offer to the public in the state, in another Member State of the European Union or Contracting State of the European Economic Area Agreement are also exempt from withholding tax at the source (Art. 196 CITA).