Corporate income tax incentive for manufacturing in Bulgaria

The tax incentive below comes as a reduction of the amount of the corporate income tax due by the tax payer entities. This reduction is considered state aid and is subject to the EU state aid rules and restrictions. The beneficiary entities are obliged to utilize the aid for specific purposes determined by law.

In principle state aid is provided as an exception and should be notified individually for approval by the European Commission. However, there are certain exemptions from this notification obligation provided strict conditions are observed and an approval by the European Commission is given for the incentive scheme.

The following two types of permissible state aid are allowed without the need for individual notification:

1. Incentive for manufacturing activities in high unemployment municipalities

The amount of the annual corporate income tax due by entities on their profits from manufacturing, including toll manufacturing, may be partly or fully reduced. Manufacturing for the purposes of this scheme means the process of creating a new product through mechanical, physical or chemical transformation (processing) of resources and raw materials with the aim of further use as well as biological transformation of living animals or plants.

The profits must be associated with manufacturing activities carried out exclusively in municipalities which were in the list of high unemployment municipalities for the previous year. High unemployment municipalities are municipalities with unemployment 35% higher than the national average. A list of such municipalities is prepared annually by the Ministry of Finance.

An entity can also apply the incentive in the following exceptions:

2. State aid eligibility conditions

Sectors to which the state aid tax incentive is not applicable

2.    General requirements

Entities can apply the schemes if by the end of the year for which the corporate tax due is reduced they do not have:

• Outstanding public liabilities subject to forcible execution and penalty interest for late payment of such;
• Outstanding penalties related to public liability legislation violations.

The right to reduction of the corporate tax due will be terminated if the entity participates in a business reorganization (e.g., a merger, a division, etc.).

3.    De minimis aid eligibility

The de minimis aid must be used for the acquisition of long-term tangible or intangible assets within three years following the year for which the amount of the corporate tax liability is reduced.

Any de minimis aid received should be declared in the annual corporate tax return of the entity.

4.    Regional investment aid eligibility

The regional investment aid should be used for acquiring tangible and intangible assets part of an initial investment . The initial investment should meet the following conditions:

• It should be completed within three years following the year for which the amount of the corporate tax liability is reduced;
• It should be carried out in municipalities included in the high unemployment municipalities list for the year of the reduction. If the municipality is removed from the list the entity can continue to apply the incentive for five consecutive years as of the year of removal of the list;
• The business activity related to the initial investment must be maintained in the relevant municipality for at least five years after the completion of the investment (the observance of this condition should be declared in the annual corporate tax returns during the five-year period);
• At least 25% of the value of the tangible and intangible assets acquired as part of the initial investment should be financed by own resources of the tax payer entity or by external financing (except for any form of state aid);
• The tangible and intangible assets should have been acquired from third parties under market conditions;
• The intangible assets included in the initial investment should be depreciable assets for tax purposes, should be used exclusively for the activities of the entity and should be included in the assets of the entity for at least five years;
• The value of the intangible assets acquired as a part of the initial investment should not be greater than the value of the tangible assets;
• The reduction of the amount of the corporate tax due should not exceed 50% of the discounted value of the tangible and intangible assets as at the end of the year for which the tax liability is reduced. The interest rate for the discounting of the value is the reference rate determined by the European Commission for the year of the reduction of the tax liability.

The planned amount for the initial investment, as well as the period for its completion, should be declared in the annual corporate tax return for the year of reduction of the amount of the tax liability.

• Individual notification for large investment projects

Regional investment aid to large investment projects   exceeding EUR 37.5 m.   (from any sources) may be granted only if:

• The beneficiary entity has notified the project to the Bulgarian revenue authorities before its beginning;
• The entity has received a positive decision further to an individual notification to the European Commission made by the Minister of Finance.

5.    Capping of the state aid

The amount of state aid that an entity can receive is limited to a certain cap. The cap is determined as a percentage from the discounted value of the tangible and intangible assets as at the moment of granting the state aid.

Both de minimis aid and regional investment aid are included when determining whether the cap is observed.

The applicable state aid caps are indicated in the table below:

6.    Violating the eligibility requirements