At the end of 2023, the Law on Local Taxes and Charges (Local Taxes and Charges) underwent significant amendments, reflecting the desire to adapt to the current economic environment and the needs of taxpayers. The main objective of these amendments, which come into force from 2024, is to ensure fairer taxation, taking into account the real market value of properties and current economic conditions.
The update of tax values is expected to lead to more transparent and efficient taxation, which in turn promotes fairness and equality between taxpayers. This underlines the importance of precise and objective valuation of properties, which is the basis for the determination of patent tax.
The amendments to the MDGT also underline the need to adapt to changing economic realities, thus aiming not only to increase local tax revenues, but also to promote investment and economic development of individual areas. These changes reflect the quest for a balance between the need for fiscal revenue and the support of businesses and citizens.
According to the Law on Local Taxes and Charges in Bulgaria, patent tax is a tax that is levied on certain types of activities called patent activities. This tax is regulated in the ZMDT and is collected by the respective municipal administration.
Patent tax is levied on individuals, including sole proprietors (ET), who carry out certain types of activities listed in Appendix No. 4 to Chapter Two of the ZMDT. These types of activities are specific and subject to patent tax.
Appendix No. 4 to the ZMDT contains a comprehensive list of types of patent activities.
In practice, the patent tax isan alternative type of tax that you can choose to pay INSTEAD of corporation tax or general income tax - commonly known as the standard method of taxation, which applies to individuals and companies under the order of the CPA (Corporate Income Tax Act) for companies or under the order of the ZDDFL (Law on Personal Income Taxes) - for individuals or ETs.
This, again, in practice means that you do not pay tax according to the formula tax = 10% (income - expenses) - paid insurance, but you pay ONLY A FIXED ANNUAL AMOUNT, according to the patent activity you carry out, in the amount determined by the municipality in which you are located - i.e. the formula is tax = X BGN. INIt should also be noted that insurance is due in both cases, but in the case of an EOOD or activity as an individual (without commercial activity), you have the right to choose according to what income the insurance will be calculated - i.e. you can also pay the minimum insurance income of 933 BGN!
According to Art. 61z of the Local Taxes and Fees Act (ZMDT), natural persons, including sole proprietors, as well as legal entities for specific activities defined in Annex No. 4 to the Act, are obliged to pay patent tax. They are taxable provided that the annual turnover for the previous year does not exceed BGN 100 000 and are not registered for VAT purposes, with some exceptions. Such persons are not subject to personal income tax or corporate income tax on income from patent activities.
The responsibility for the determination and collection of the patent tax falls on the municipal administration, and this tax is calculated and collected in relation to the types of activities carried out by the individual or the ET concerned.
This tax constitutes one way of taxing individuals who carry out certain types of business activities, and thus they participate in the financing of municipal needs. It is important to keep in mind that the exact rules and rates of patent tax may change over time and vary depending on the municipality and types of activities, so it is important to consult the relevant municipal administration or tax advisor to find out the specific details and obligations regarding patent tax in your case.
In 2024, the Local Taxes and Charges Act (LPT) includes key amendments and additions that are already in force. Among them is the tax exemption of properties with high energy efficiency, including buildings with energy consumption class “A” and buildings with close to zero energy consumption. It provides for a differentiation of property tax depending on the location and type of property. Updates to the base tax value for real estate and agricultural land are also being introduced. In addition, the amendments affect the taxation of vehicles and ships, facilitating the process through automated data provision. The alignment of the maximum patent turnover with the VAT threshold and new rules on patent tax for legal entities operating as catering and entertainment establishments are among other significant changes.
The amount of patent tax for various activities in Bulgaria is determined by the municipalities within the limits established by the Local Taxes and Fees Act (ZMDT). Rates vary greatly depending on the type of activity, such as shoemaking services can be taxed from 40 to 120 leva per year, while pawnshops are subject to taxation from 3000 to 28 000 leva per year. This diversity reflects the different economic potential and risk associated with each activity. The municipalities establish the specific rates through regulations that allow adaptation to local conditions and economic environment.
The filing of patent tax is a process that requires persons practicing activities subject to this type of taxation to file a tax return with the respective municipality. This must be done by January 31 of the current year for income earned in the previous year. In the event that the activity is started after that date, the reporting obligation arises immediately before its start. Thus, the legislation provides for a mechanism for updating tax information in case of changes in circumstances that affect the amount of tax, such as a change in the volume of activity or in the structure of the enterprise.
It is also envisaged to stimulate the timely fulfillment of tax obligations by providing a discount of 5% for persons who file their return and pay the patent tax due in full by the end of January. This measure aims to promote transparency and facilitate the administrative process for both taxpayers and municipal authorities.
For those persons who do not have the opportunity to pay it at once, patent tax can also be paid quarterly, as follows:
For persons who undergo changes in their activities that may affect their tax obligations, it is mandatory to file a corrective declaration within seven days of the change occurring. This includes cases such as a change in turnover, transfer of business, registration or termination of activity. Such flexibility and the obligation to update ensure that taxation is in line with the current economic reality and scope of activity of individuals.
Tax returns are filed in the municipality in whose territory the activity is carried out, and in cases where the activity is not carried out from a permanent establishment or address, the declaration is filed in the municipality where the permanent address of the individual or sole trader is. Thus, the legislation ensures that each taxpayer can be adequately taxed depending on the specifics and location of his activity, while ensuring an effective and fair tax collection process.
The Local Taxes and Fees Act offers several types of tax benefits for patent tax, namely:
We from Elan Consulting have already devoted material on the topicwhich is more profitable, self-insured person or EOOD in Bulgaria,which we strongly recommend you read.
In practice, however, the question is not entirely accurate - i.e. These are not mutually exclusive options! It is quite possible to have a registered EOOD and still pay patent tax once during the year and insurance of your choice in the amount of between 933 and 3750 BGN!
However, we can say that the choice of paying patent tax instead of registering an EOOD and taxing a corporation tax (if you know that with an EOOD you will cross the threshold of BGN 100,000 for VAT registration) can be advantageous for entrepreneurs and self-employed people with small businesses. Patent tax is a fixed rate, independent of profit, which provides predictability and facilitates financial planning. This type of taxation is particularly attractive for low-turnover activities, where corporate tax and additional liabilities can prove to be heavier. Patent tax also excludes income from taxation on general income, which can reduce the overall tax burden for those who opt for this regime.
It is also important to take into account that when registering a sole proprietorship with limited liability (LLC), there is limited liability up to the amount of capital invested in the company, therefore it is a less risky method if you are not sure where the business will go.
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Patent tax is a special tax regime for small entrepreneurs and sole proprietors, which allows certain types of activities to be taxed at a fixed tax rate. It is designed for individuals with an annual turnover below a certain threshold and offers a simplified way to calculate and pay taxes.
Private individuals, including sole traders, and legal entities benefit from the patent tax for certain types of activities, whose annual turnover does not exceed the established legal threshold, and who are not registered for VAT, except in specific cases.
Persons subject to patent tax can benefit from a reduction in the tax rate of up to 50% for persons with reduced working capacity, pensioners, and when training apprentices. Also, when carrying out more than one patent activity, the tax is due only for the activity with the highest tax.
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