Accounting for freelancers in Bulgaria

Accounting for freelancers in Bulgaria is an important aspect of their activity, which includes a number of specific requirements related to insurance, taxation and reporting. Many specialists ask themselves questions such as: “What is the liberal profession and which persons fall into this category?”, “How is the minimum insurance for a self-insured person determined and what are the features of insurance in case of a sick person?”, “How is registration under BULSTAT of a self-insured person carried out?” and “How is the income from the activity accounted for?”. All these issues are key to the proper functioning of lawyers, engineers, notaries, translators, doctors, forensic experts, insurance agents, as well as other freelancers.

One of the first steps in starting an activity as a freelancer is registration under BULSTAT, and many of these professionals are looking for information on “freelance registration” and whether it is carried out differently for different categories of specialists. The issue of “freelance invoicing” is also relevant, since different professionals are interested in whether they should charge VAT, when the VAT registration obligation arises and what documents they should keep for reporting purposes. Accounting for freelancing income is an important process in which the legally recognized costs of the activity must be observed and correct accounting must be kept.

Insurance is one of the most discussed issues among self-insured persons. Common queries include “What is the minimum insurance income for a self-employed person?”, “How do I use a freelance insurance calculator?” and “What are the insurances in case of an inpatient of a self-insured person?”. Also, there are many uncertainties about reconciling a contract of employment activity with a freelance profession — for example, “Can I be employed under an employment contract and practice a freelance profession at the same time?” and “What are the tax and insurance obligations in this case?”.

The legally recognized costs of the liberal professions are essential for determining the tax base and optimizing the levies due. Freelancers are interested in how they can reduce their tax burden and which expenses can be recognized without the need for documentation.

In this article we will examine in detail all these issues in order to provide useful information for professionals practicing freelance in Bulgaria. The team of “Elan Consulting” offers professional accounting and tax advice, providing competent support to lawyers, engineers, doctors, notaries, architects, translators and all other freelancers in Sofia, Burgas, Pomorie, Karnobat, Sunny Beach, Aytos, Nessebar, Sozopol, Primorsko and the whole of Bulgaria.

What is the complete list of freelance jobs in Bulgaria? What is a freelance profession?

Freelance in Bulgaria is a special type of activity that is carried out by individuals without creating a commercial company, and usually involves intellectual or creative services. According to § 1, item 29 of the Supplementary Provisions of the Personal Income Tax Act, persons exercising a liberal profession are “natural persons who carry out professional activities at their own risk and at their own expense, not being registered as sole traders, including:”. The law lists the specific categories of professions that fall into this group.

The full list of liberal professions according to the same provision includes:

• Chartered Accountants
• Consultants
• Auditors
• Attorneys
• Notaries
• Private bailiffs
• Jury
• Experts for the court and the prosecutor's office
• Licensed Appraisers
• Industrial Property Representatives
• Medical professionals (doctors, dentists, pharmacists, etc.)
• Translators
• Architects
• Engineers
• Technical supervisors
• Actors of culture, education, art and science (artists, writers, musicians, artists, etc.)
• Insurance agents
• Other natural persons who carry out professional activities and are subject to registration in accordance with Art. 3, para. 9 of the BULSTAT Register Act.

Any person who falls into these categories and exercises his activity independently is considered a self-insured person and should register in the BULSTAT Register within 7 days of starting the activity, pursuant to Article 3, paragraph 9 of the BULSTAT Register Act. This means that they are fully responsible for their activity and the costs associated with it, without an employer taking on insurance obligations on their behalf.

The distinction between freelancing and commercial activity is important because freelancers are not traders within the meaning of the Commercial Act and are generally not subject to mandatory VAT registration unless they exceed the turnover for registration or carry out specific activities that require such registration. However, they are obliged to report their income and make insurance contributions as self-insured persons.

The law provides that these professions can be exercised both independently and within associations, such as law firms, but without acquiring commercial status. This means that the legal and tax regime for these persons is different from that of companies and sole traders.

In view of the above, freelancers should comply with specific accounting and insurance requirements, such as keeping records of their income, paying insurance contributions on selected insurance income, as well as compliance with the requirements for issuing documents for the income received.

How is income from the exercise of a freelance profession accounted for? What are the tax and social security obligations of freelancers?

Accounting for earnings in the liberal profession depends on the legal form under which the person carries out his activity. First, it should be determined whether the person will work as a natural person (self-employed person) or organize his activity through a commercial company (for example, EOOD, Ltd or as sole trader - ET). Depending on this choice, different accounting and tax rules apply.

Reporting of income from the liberal profession as an individual (self-employed person)

Persons exercising a liberal profession as individuals (in the event that they exercise their activity as individuals who do not have the status Merchant under the Commercial Law) have two main obligations - to pay income tax and compulsory insurance contributions. In this sense, they do not keep classic bilateral accounting. This group of persons is taxed in accordance with Art. 29 of the Personal Income Taxes Act (ZDDFL). Their taxable income is formed by deducting legally recognized expenses from the income acquired. This means that the law recognizes a certain percentage of income as expenses for the activity, without requiring documentary proof that they were realized. This facilitates the taxation of the liberal professions by eliminating the need to collect and store invoices and other documents proving costs for materials, transportation, office equipment and other activities related to the profession.

Regularly recognized costs

According to Article 29, paragraph 1 of the ZDDFL, the percentages of legally recognized expenses are different depending on the nature of the activity. For lawyers, the legally recognized expenses are 40% of the income (Art. 29, para. 1, item 2, letter “d” of the ZDDFL). For other liberal professions, including translators, doctors, architects, engineers and other specialists, the costs are recognized at the rate of 25% (Art. 29, para. 1, item 3 of the ZDDFL). This means that if a person has received an income of BGN 50,000 for the year and exercises a liberal profession other than the lawyer, his taxable income will be BGN 37,500 (BGN 50,000 — 25%). This income is subject to 10% income tax according to Art. 48, para. 2 of the GDPR.

Insurance contributions

In addition to taxation, freelancers are obliged to make insurance contributions as self-insured persons. According to Art. 4, para. 3, item 2 of the Social Insurance Code (CSD), they are subject to compulsory disability insurance due to general illness, old age and death. Insurance contributions are calculated on a selected monthly income, which cannot be lower than twice the amount of the minimum wage for the country. Contributions shall be paid by the 10th of the month following the month to which they relate. At the end of the year, the social security income is equalized in accordance with Article 6, paragraph 8 of the CSR, and the annual insurance income is formed by dividing the taxable income by the number of months during which the activity is carried out. If the annual income is higher than the previously declared monthly income, the difference in insurance must be paid in the deadlines for the payment of taxes under the ZDFL.

Registration under the VAT

Persons exercising a liberal profession are considered taxable persons within the meaning of Article 3, paragraph 2 of the Value Added Tax Act (VAT) when they carry out an independent economic activity. This means that they are subject to VAT registration upon reaching certain conditions, both for compulsory and voluntary registration.

Compulsory VAT registration for persons exercising the liberal profession occurs when they reach a taxable turnover of BGN 166 000 or more for a period not longer than the last 12 consecutive months prior to the current month, pursuant to Article 96, paragraph 1 of the VAT Act. In such a case, they are obliged to submit an application for registration to the competent territorial directorate of the National Revenue Agency (NRA) within 7 days of the expiry of the tax period during which this turnover was reached. If the turnover is reached for a period not exceeding two consecutive months, including the current one, the person is obliged to submit the application within 7 days from the date on which the turnover was reached.

In addition to reaching the threshold under Art. 96, mandatory VAT registration may occur in other cases. For example, if a person exercising a liberal profession receives services from foreign persons with a place of performance in Bulgaria, for which the tax is payable by the recipient, it should be registered in accordance with Art. 97a, para. 1 of the VAT Act. In this case, the application for registration must be submitted no later than 7 days before the date on which the delivery tax becomes chargeable. Also, if the person provides services with a place of performance in another EU Member State, for which the tax is payable by the recipient in the respective Member State, pursuant to Article 97a (2) of the VAT, registration is mandatory. This registration must be made no later than 7 days before the date of occurrence of the tax event.

Freelancers who make intra-Community acquisitions of goods from another EU Member State and whose value exceeds EUR 10 000 in the current calendar year are also subject to mandatory VAT registration in accordance with Article 99 of the VAT Code. In this case, the application must be submitted no later than 7 days before the tax event, exceeding this threshold.

Although they are not required to register, freelancers can opt for voluntary VAT registration. According to Art. 100, para. 1 of the ZVAT, any taxable person who has not reached the threshold for compulsory registration has the right to register for VAT by choice. This registration can be useful if the person wants to benefit from a tax credit for the expenses incurred or if he works mainly with other VAT registered persons and wishes to be more competitive. Voluntary registration binds the person to all obligations under the VAT, including the submission of monthly tax returns and the maintenance of VAT journals.

However, with voluntary registration, there are restrictions. According to Art. 108, para. 2 of the ZVAT, a registered person may not terminate his registration earlier than 12 months from the beginning of the calendar year following the year of registration. This means that if a person exercising a liberal profession registers for VAT by choice, he must remain registered for at least one calendar year before he can apply for deregistration.

If a person exercising a liberal profession fails to submit an application for compulsory registration within the time limit, the NRA authorities may carry out official registration in accordance with Art. 102 of the GDPR. In this case, the person will be registered by an act of registration and will owe tax on all taxable supplies made after the date on which he was supposed to submit the application. In addition, for non-compliance with the registration deadline, penalties provided for in the Tax and Insurance Procedure Code (DOPC) may be imposed.

Annual tax return

Freelancers submit an annual tax return under Art. 50 of the ZDDFL by April 30 of the following year, in which they declare the income earned, the legally recognized expenses, the insurance contributions and the tax due. If advance tax contributions are made in the course of the year in accordance with Art. 43, para. 6 of the GDPR, they are deducted from the annual tax due. In the event that the person has paid less than what is due, the difference is paid until April 30.

Accounting for freelancing income through a trading company

Freelancers may choose to carry out their activities not only as individuals (self-employed persons), but also through a commercial company — for example, a Sole Proprietorship with Limited Liability (EOOD), Limited Liability Company (LTD) or Sole Proprietor (ET). The choice of legal form affects the way income is taxed, secured and accounted for.

Taxation of income when working through a commercial company

When exercising a freelance profession through a commercial company, the activity is not taxed under the GDPR, but is subject to taxation under the Corporate Income Tax Act (CPA). In this case, the income of the company is not directly taxed as the personal income of the person, but is subject to taxation as the profit of the company.

According to Art. 20 of the CPA, the profits of commercial companies are subject to corporate tax at the rate of 10%. The taxable profit is defined as the difference between income and expenses, according to the provisions of Article 18 of the CPA. This means that, unlike freelancers such as individuals who benefit from legally recognised costs, companies can deduct costs actually incurred (documented by invoices, contracts and other accounting documents).

If the company wishes to distribute its profits to its owner, this can be done through dividends. According to Article 38, paragraph 1 of the ZDDFL, dividends distributed to an individual are subject to a final tax of 5%, which is withheld by the company and paid to the budget by the 30th of the month following the quarter of distribution of profits.

Another way to withdraw funds is for the owner to be appointed to an employment contract or work under a civil contract in his own company. In this case, all insurance contributions and taxes will be due, as in a simple employment or civil contract.

Insurance obligations of the owner of the trading company

The provision of self-employed persons through a commercial company depends on the nature of the work carried out and on whether the person participates in the management of the company or performs personal work in it. A fundamental principle in the insurance legislation is that insurance arises from the day on which the person begins to engage in labor activity within the meaning of Article 10, paragraph 1 of the Social Insurance Code (CSR).

Depending on the functions performed, partners and owners of commercial companies can fall into two main categories of insurance — as managers of a company or as self-employed persons engaged in personal work.

1. Provision of a manager of a commercial company

If the owner or partner of the company performs management and control functions, he is subject to compulsory insurance as a manager, in accordance with Article 4, paragraph 1, item 7 of the CSO. The management of the company is legally regulated in Art. 137, para. 1, item 5 and Art. 141, para. 7 of the Commercial Law (TC), which stipulate that the relations between the manager and the company are regulated by a contract for the assignment of management.

When concluding such a contract, the manager must receive remuneration that does not depend on the financial result of the company. In this case, insurance contributions are due on the remuneration, which include:

• state social insurance (LLC) — general illness and maternity, disability due to general illness, old age and death, occupational accident and occupational disease and unemployment;
• health insurance (WHO);
• contributions for additional compulsory pension insurance (SPO) to the universal pension fund (for persons born after 31.12.1959).

Insurance contributions are paid on:

• the actual gross monthly remuneration received or the accrued but unpaid remuneration (Article 6 (2) of the CSR);
• but not less than the minimum social security income established by the Law on the State Social Security Budget (ZBDOO) for the relevant year (Art. 6, para. 3 of the Civil Code);
• and not more than the maximum monthly amount of social security income, which is also determined annually in the OHIM.

Contributions shall be made by the 25th of the month following the month to which they relate.

2. Provision of an owner or partner who does personal work in the company

If the owner or partner carries out labor activity in the company, but is not a manager, but performs personal labor in another professional activity (for example, lawyer, engineer, architect, doctor), he is subject to insurance as a self-insured person under Article 4, paragraph 3, item 2 of the CSO.

Self-insured persons are compulsorily insured for disability due to general illness, for old age and for death, and at their choice may also be insured for general illness and maternity (Article 4, para. 4 of the Code of Civil Procedure).

Insurance income of self-insured persons

Insurance contributions are due in advance on selected monthly income, which cannot be:

• lower than the minimum monthly social security income established in the OHIM for the relevant year;
• higher than the maximum monthly insurance income (also defined in the ZBDOO).

At the end of the year, the equalization of insurance income is carried out in accordance with Article 6, paragraph 9 of the CSO. This means that:

• the annual social security income is calculated on the basis of the taxable income declared in the annual tax return under the ZDFL;
• if the real annual income is higher than the previously declared monthly income, the person must pay additional insurance on the difference.

When does the insurance obligation arise?

The obligation to insure as a self-employed person arises from the day of commencement of the employment activity and continues until its interruption or termination (Art. 1, para. 1 of the Ordinance on Public Insurance of Self-Insured Persons, Bulgarian Citizens Working Abroad and Seafarers (NOBOLSGRCML)).

When starting, interrupting or resuming the activity, the person must submit a declaration to the NRA within 7 days (Art. 1, para. 2 of the NOOSLBGRCML).

Provision of a self-insured person who participates in several companies

If a person is a partner or owner in more than one company and performs personal work in them, he may choose to make his insurance contributions only through one of the companies (Art. 2, para. 3 of the NOOSLBGRCML). The change of the insurance base is made by submitting a declaration form No. 1 with an indication of the selected EIC of the company.

Documenting income and expenses

Unlike the liberal professions, which work as individuals and can use legally recognized costs, commercial companies must document their actual expenses. This includes expenses for rents, materials, services, wages, insurance, depreciation and other eligible expenses.

Companies are required to keep bilateral accounting under the Accounting Act. At the end of each year, they must prepare an annual financial statement to be filed with the Commercial Register by June 30 of the following year.

VAT registration

A commercial company is obliged to register under the Value Added Tax Act (VAT) upon the occurrence of certain circumstances that require mandatory registration. The main criterion for compulsory VAT registration is the attainment of a taxable turnover of BGN 166 000 for a period not longer than the last 12 consecutive months prior to the current month, pursuant to Article 96 (1) of the VAT Act. In this case, the company is obliged to submit an application for registration with the competent territorial directorate of the National Revenue Agency (NRA) within 7 days of the expiration of the tax period during which this turnover was reached. If the taxable turnover is reached within two consecutive months, including the current one, the deadline for submitting an application is 7 days from the date of reaching the turnover.

The taxable turnover includes the taxable bases of all taxable supplies of the company, including those taxable at zero rate, as well as certain supplies of financial and insurance services, where they relate to the company's main business. Taxable turnover does not include sales of fixed assets used in the company's activities, as well as supplies for which tax is chargeable to the recipient under the reverse charge mechanism.

Apart from reaching the threshold of BGN 166 000, a commercial company may be obliged to register for VAT in other cases. For example, if the company carries out intra-Community acquisitions of goods from other Member States of the European Union, it must be registered in accordance with Art. 99 of the VAT when the total value of these acquisitions exceeds 10,000 euros in the current calendar year. In this case, the application for registration must be submitted no later than 7 days before the date of the tax event by which this threshold is exceeded.

If the company receives services with a place of performance in Bulgaria from a supplier established outside the country, for which the tax is payable by the recipient, it must be registered under Art. 97a, para. 1 of the GDPR. This registration is mandatory, regardless of the turnover of the company, and the application must be submitted no later than 7 days before the date on which the service tax becomes chargeable. The same requirement applies to cases where the company provides services with a place of performance in another Member State for which the tax is payable by the recipient pursuant to Article 97a (2) of the VAT Act.

If a trading company sells goods with assembly and installation in Bulgaria, and the supplier is established in another Member State, the company must register for VAT in accordance with Article 97 of the VAT, unless the recipient is already registered for VAT. In this case, registration must be made no later than 7 days before the occurrence of the tax event.

If the company carries out intra-Community distance sales of goods with a place of performance in another Member State, it is obliged to register for the application of the regime in the Union pursuant to Article 97c of the VAT Act. This requirement arises when the total value of those supplies exceeds the threshold set for the Member State in question.

In cases where a commercial company fails to register for VAT within the period provided by law, the NRA authorities may carry out official registration in accordance with Art. 102 of the ZVAT. In this case, the tax is due from the date on which the company was supposed to file an application for registration, and penalties may be imposed for non-compliance with legal requirements.

Commercial companies that are not obliged to register for VAT purposes have the possibility of voluntary registration in accordance with Article 100, paragraph 1 of the VAT Act. Voluntary registration can be advantageous for companies that carry out transactions with other registered persons and wish to benefit from a tax credit for purchased goods and services. However, in the case of voluntary registration, the company undertakes to comply with all the requirements of the VAT, including the submission of monthly tax returns and the maintenance of VAT journals.