Recalculation of Withholding Tax Paid in Bulgaria
Withholding tax on income earned by non-resident entities in Bulgaria is due on the gross amount of taxable income. This often results in an effective tax rate significantly exceeding the statutory 10%, as the foreign taxpayer is unable to fully credit the Bulgarian withholding tax against corporate tax liabilities in their country of residence. Consequently, the withholding tax can become an unforeseen additional cost — in some cases, turning an otherwise viable transaction into a loss-making one.
The procedures under Article 202a of the Corporate Income Taxation Act and Article 37a of the Personal Income Taxes Act allow for the deduction of expenses when calculating the withholding tax base in Bulgaria (instead of taxation on a gross basis). This option is available to taxpayers resident in EU member states and Norway.
This mechanism allows for effective tax rate optimization and also, can mitigate the adverse effects of unsuccessful attempts to apply a relief under a Double Tax Treaty.
At TAX COMPASS, we have practical experience in successfully applying this recalculation procedure, enabling non-resident taxpayers to reclaim significant amounts of Bulgarian withholding tax.
