What is a tax credit and VAT refund in Bulgaria?

A detailed guide to VAT refund in Bulgaria and up-to-date VAT refund calculator, use of tax credit when importing, including from third, non-EU countries, exceptions, and more!
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What is a tax credit and VAT refund in Bulgaria?
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In Bulgaria, the tax system is often too complicated for businesses to understand, especially for foreigners who want to open a company and start their own business. Recently, we receive a lot of inquiries from our clients related to the refund of VAT - when importing from a third country, in a three-way operation, when buying goods from a company registered for VAT in Bulgaria, intended for export to a member state of the European Union. We at Elan Consulting, an accounting firm with extensive experience and professionalism, offer our clients in Sofiaand all the cities and towns in Burgas region-Burgas, Sunny Beach, Pomorie, Nessebar, Karnobat, Sozopol, Aytos and Tsarevo, high-quality services focused on the use of tax creditand VAT refund. We, of course, work remotely and with clients from all 27 regional cities in Bulgaria, having invented a unique accounting system that allows online accounting of any type of business, regardless of where it is located. The following topics will be key highlights in our discussion, which aims to provide valuable information and guidance for effective tax management:

  • VAT tax credit: What it is and how it can be beneficial for your business.
  • Right to deduct tax credit 12 months: Consideration of the terms and conditions for the exercise of this right.
  • Cars with the right to tax creditand no right to tax credit: How to find out which category of cars allows the deduction of a tax credit.
  • Car tax credit 6+1: Features and application in practice.
  • Examples of VAT refund: Analysis of specific cases.
  • Missed VAT refund procedureand Unclaimed VAT refund: How to deal with these situations.
  • VAT refund calculator: Tools to facilitate the procedure.
  • Refund of VAT on imports from a third country: Specific conditions and steps.
  • Refund of VAT to individualsand Withholding and Refund of VAT: Overview of processes and rules.

At Elan Consulting we have dedicated our mission to supporting businesses in Bulgaria by providing up-to-date, accurate and useful information that can help to better understand and manage tax processes. Count on our team of experts who are ready to assist you every step of the way to tax optimization.

What does the term “tax credit” mean under the VAT Act in Bulgaria?

The concept 'tax credit'in Bulgaria, according to Art. 68, para. 1, item 1from Value Added Tax (VAT) Act, represents the amount of VAT that a natural or legal person registered under the VAT Act in Bulgaria may deduct from the taxable supply of goods or services received by him, except by those legal entities registered on the basis of Art. 97a, Art. 99, para. 1 - 6 and Art. 100, para. 2 VAT and persons established on the territory of the Republic of Bulgaria, registered only under Art. 156 of the Vat Act. The term “VAT refund in Bulgaria”includes the concept 'tax credit', but it is more general in that it covers the other three scenarios - the amount of tax that a VAT registered person is entitled to deduct from his tax obligations for:

  • Payment made by him before the taxable event for the taxable supply occurred;
  • Imports made by him;
  • The tax payable by him as a payer according to Art. 82 - 93 from the VAT Act.

This allows businesses to optimize their tax liabilities by deducting the VAT paid on business-related purchases from the VAT due on their sales.

Example of using a tax credit for goods or services received

We are looking at a company that buys computer equipment for its office in the amount of 3600 BGN, of which 600 BGN is the VAT charged. During the same reporting period, the company provided IT services worth BGN 4680, including BGN 780 VAT. In this situation, the company has the right to deduct the 600 BGN VAT paid for the purchases from the 780 BGN sales VAT due. Thus, as a final VAT result, the company owes BGN 180 to the state (BGN 780 VAT on sales — BGN 600 VAT on purchases).

Example of VAT refund on importation of goods

Let us consider the following example, in which we have a company, for example, “Importer” Ltd., a sole proprietorship limited liability company whose main activity is the manufacture of clothing. (The example, of course, is purely illustrative and has no relation to actually existing companies). The materials needed for the production are supplied from Turkey, with the purchase being made by the related German company “Intermediary” Ltd., which then supplies the materials to “Importer” EOOD in Bulgaria. It is important to note that “Importer” EOOD is registered as the consignee in the customs declarations and is responsible for the payment of the VAT charged by the Customs Bureau - “Free Borders”.

Importer within the meaning of § 1, item 38 of the GDPRis the person who is liable for payment of import duties and holds a customs declaration stating that he is the importer. In the case of “Importer” EOOD, the company meets these conditions and is therefore an importer according to the definition given in the law.

Does “Vnositel” EOOD have a legal basis for a refund of the VAT paidwhen importing materials from Turkey? Pursuant to Article 69 (1) (2) of the VAT Act, a person registered under the VAT Act has the right to deduct a tax credit for imports made by him if the goods are used for the purposes of his taxable supplies. In the present case, the fabrics imported from “Vnositel” Ltd are used for the manufacture of clothing, which is the main activity of the company and is considered a taxable supply. This means that “Vnositel” Ltd has reason to refund the VAT paid on imported materials from Turkey, using the tax charged as a tax credit.

The tax credit in this context is an opportunity “Vnositel” Ltd to reduce its tax obligations to the state by deducting the VAT paid on imported goods that were used in the process of manufacturing clothing intended for sale. This mechanism highlights the efficiency of the tax credit as a tool for managing capital expenditures in businesses and its ability to support the financial stability of enterprises.

How is VAT charged and refunded on importation?

The process of charging and refunding VAT on importation into Bulgaria is strictly regulated and is carried out in accordance with a number of legal requirements set out in Value Added Tax (VAT) Act. The basic steps and conditions for exercising the right to deduct a tax credit on importation are set out in detail in Articles 69, 71 and 90 of the VAT Code.

Conditions for the emergence and exercise of the right to deduct a tax credit on importation:

According to Art. 69, para. 1, item. 2from the VAT, a person registered under the VAT Act has the right to deduct the tax charged on importation of goods if the goods are used for the purposes of the taxable supplies carried out by the registered person and do not fall within the limits for the right to deduct the tax credit provided for in Art. 70of the same law.

Art. 71, item 3The VAT Directive specifies that, in order to exercise his right to deduct a tax credit on importation, the person must cumulatively meet the following conditions:

  • Possession of a customs declaration in which he is listed as the importer.
  • The tax is paid in the order of Art. 90, para. 1from the VAT.

Accrual of import tax:

According to Art. 90, para. 1and and. 2from the VAT, the importer of goods enters the tax effectively charged by the customs authorities into the republican budget. The import of goods is settled and the tax is charged to the account of the relevant customs office that arranges the import.

When can I claim a VAT refund in Bulgaria?

The Law on Value Added Tax (VAT) in Art. 71sets out the conditions under which a person may exercise his right to deduct a tax credit. These conditions cover various situations that may arise in the course of an economic activity, including importation. The main conditions include:

  1. Possession of a tax document, which is compiled in accordance with the requirements of Articles 114 and 115, and in which the tax is indicated on a separate line for supplies of goods or services for which the person is the recipient.
  2. Issuance of a protocolafter Art. 117or Art. 163b, para. 2in accordance with the requirements of Art. 86, in cases where the tax is chargeable to the recipient as a payer under Art. 82.
  3. Possession of a customs import document, in which the person is indicated as the importer, and of a document, a copy of a document or document proving that the tax was paid in accordance with Art. 90, para. 1- in the case of importation by Art. 16.
The right to deduct a tax credit arises only for a tax that has been paid effectively in the Republican budget.It is important to underline that import VAT obligations cannot be offset against the person's claims to the budget of any nature. If the tax is repaid by offsetting by a competent administrative authority, the person does not have the right to deduct a tax credit for that tax, since it was not “paid in accordance with Article 90 (1) of the VAT Act”.

Once the tax has been paid, and the importer has the necessary documents that certify the import and payment of VAT, the person can exercise his right to deduct the tax credit. This right is exercised when the tax is entered in the purchase book for the relevant tax period in which the right to deduct arose or in one of the following three tax periods.

It is important to note that the right to deduct a tax credit arises only for tax that has been paid effectively and cannot be offset by other obligations to the budget.

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VAT refund calculator for goods or services received in taxable supply

The VAT refund calculator provides an easy and intuitive way to calculate the potential refund or deduction of value added tax related to purchases and sales of goods and services. By entering gross amounts and VAT rates for specific purchases and sales, consumers can quickly find out the amount of VAT that can be deducted or refunded. However, VAT refund is a process characterized by numerous nuances, exceptions and specific regimes that require a detailed understanding of the current legislation and applicable rules.

In view of the complexity of the VAT refund process, it is advisable for clients to contact a qualified specialist from Elan Consulting, who can provide professional support and ensure that all aspects of the VAT refund are taken into account. Elan Consulting has experts who have in-depth knowledge of local and international tax law and are trained to identify opportunities to optimize tax benefits for their clients. Turning to a specialist, you will not only increase your chances of a successful VAT refund, but also minimize the risk of errors and possible adverse tax consequences.

When can we NOT use tax credit/VAT refund in Bulgaria?

The Law on Value Added Tax (VAT) sets certain restrictions on the right to deduct a tax credit, which are important for any entity engaged in economic activity. IN Art. 70the conditions under which the right to deduct a tax credit are listed not available, whether the conditions of Article 69 or 74 are met:

  • Where the goods or services are intended for exempt suppliesunder Chapter Four of the VAT Act. This includes a number of goods and services which are exempt from VAT and to which the right to use the tax credit cannot be applied.
  • When the goods or services are intended for free supplyor more generally for activities other than the economic activity of the person, EXCEPT, if it is not about the special, working, uniform and representative clothing and personal protective equipment provided free of charge by the employer to his employees, including those under management contracts, for the purposes of his economic activity, transport services from the place of residence to the place of work and back by the employer to his employees, including those under management contracts, provided free of charge by the employer for the purposes of his economic activity, the goods or services used in the performance of the a service by a holder/user for the repair of an asset leased or made available for use, the goods or services used in the performance of a service by a holder/user to improve an asset leased or made available for use, the gratuitous provision of goods or services of negligible value for advertising purposes and the provision of samples, and others.
  • Items and services, used for representational or recreational purposes, also exclude the right to use a tax credit. According to Art. 62.from the Regulations for the application of the VAT Law, representative or entertainment purposes in this context are - welcoming, staying and sending guests and delegations, overnight stays, consumption of food and drinks; organization of business meetings, celebrations, entertainment events, excursions, UNLESS it is aboutorganization of symposia, congresses, conferences and other similar events, which are directly related to the presentation or testing of the goods or services offered by the person in the framework of his independent economic activity.
  • Motorcycles and passenger cars, as well as related maintenance, repair, and operation services, generally do not qualify for a tax credit unless they are used exclusively for business purposes specified in the law - namely, they are used solely for transport and security services, taxi transportation, rental, courier services or training of drivers of motor vehicles, including in the subsequent their sale
  • Goods confiscated in favor of the stateor in cases where the right to a tax credit is sought in respect of goods intended for use in the construction of buildings destroyed as illegally constructed.

In addition, a tax credit is not recognised for VAT that has been wrongfully charged.

Is it possible to refund VAT from individuals?

The VAT refund for foreign individuals who are not established in the European Union is regulated by Ordinance No N-12 of 24 August 2006. This possibility allows such persons to receive back VAT on goods purchased in Bulgaria and exported for personal use unchanged. To take advantage of this option, foreign individuals must meet certain criteria. It is important that the goods are exported outside the European Union by the end of the third month following the month of purchase and that the value of VAT on each invoice exceeds BGN 50. In addition, the person must request the refund no later than six months after the invoice is issued.

The recovery process can be carried out through an agentor directly from the supplier of the goods. The foreign person must submit the necessary documents, including a certified refund request and the original invoice, to the agent or supplier. It is important to note that VAT is not refundable for alcohol, tobacco products and liquid fuels.

Refund of VAT It is an important opportunity for foreign individuals, allowing them to recover part of the funds spent on the purchase of goods in Bulgaria, which they then export outside the EU for personal use. The procedure requires careful adherence to the established rules and submission of all necessary documents on time.

Refund of VAT on imports from a third country (non-EU member states)

With the introduction of special regime for distance sales of goods imported from third countries or territories, Bulgarian legislation offers a simplified approach to the processing of customs declarations and deferred payment of import tax. This regime, regulated in art. 57aof the Value Added Tax Act (VAT), allows importers to declare in the customs import declaration that they apply the special regime by indicating their individual identification number under that regime.

To benefit from the special regime, the importer must meet certain conditions, such as that the goods do not exceed the value of 150 euros and that they are not excise goods. Also, the goods must be intended for non-taxable persons. Based on these criteria, the customs authorities authorise the lifting of the goods without the tax actually paidin the budget at the time of lifting.

Other special arrangements for declaration and deferred payment of import tax, presented in art. 57b, offers taxable persons who meet certain conditions the possibility of deferred payment of VAT. This includes the importation of goods in the form of consignments with a value of less than EUR 150, which are not excise goods and are intended for non-taxable persons. Importers meeting these criteria may keep an electronic register and file a monthly declaration with the Customs Agency.

Importers applying the special procedure shall indicate on the customs declaration that they apply the procedure and identify the consignee of the consignment. The monthly return, in which the total amount of VAT for the relevant period is reported, must be submitted by the 16th of the month following the reporting period.

The recipient of the shipment, the non-taxable person, is obliged to pay VAT upon receipt of the shipment. The importer, in turn, collects the tax and is obliged to pay it by the 16th of the month following the month of acceptance of the shipment.

Where the conditions for the special regime are not available, the general rules of the VAT apply. It is important to note that for the tax paid under the special regime there is no entitlement to a tax credit.

This approach aims to facilitate importers and optimise the VAT refund process for imports from third countries, while ensuring efficient tax collection.

Tax credit for cars (incl. 6+1)

In the context of Value Added Tax (VAT) Act, the rules around car tax credit, including for cars with 6+1 seats (seven seats), are subject to specific restrictions and conditions. These rules determine in what circumstances a business can claim a tax credit related to the purchase, maintenance and operation of motor vehicles.

The basic ruleaffects the limitationswith regard to the deduction of a VAT tax credit in the case of cars. According to Art. 70 of the ZDDS, the right to deduct a tax credit is not available for cars, unless they are used exclusively for business purposes. This means that for motorcycles and passenger cars, including those with 6+1 seats, the tax credit can be deducted only if the vehicle is used entirely for the needs of the economic activity of the person.

Exist Exceptionswhich allow the deduction of a tax credit for such cars:

  • When cars are used exclusively for transport and security services, taxi services, rental, courier services or driver trainingof motor vehicles.
  • In cases where the cars are intended only for resale(commercial stocks).

Specific for 6+1 cars, the conditions and restrictions for deducting a tax credit are the same as for all other passenger cars. It is important to emphasize that the right to a tax credit arises only if the car is used entirely for economic activity and is not intended for personal use or other purposes outside the person's activity.

Imports of which types of goods are not subject to VAT?

The Law on Value Added Tax (VAT) in Art. 58provides for exemption from import duty for certain categories of goods. These exceptions are explicitly stated and are intended to relieve certain sectors, promote international cooperation, support educational, scientific and cultural activities, or respond to emergencies such as the COVID-19 pandemic. Imports of the following types of goods shall not be subject to VAT:

  • Goods imported from diplomatic missions, consulatesor members of their staff who qualify for exemption from import duties.
  • Goods imported from the European Union, European Atomic Energy Community, European Central Bank, European Investment Bankor by bodies of the European Union to which the Protocol on the Privileges and Immunities of the European Union applies, provided that this does not lead to distortion of competition.
  • Goods Imported by International Organizations, other than those referred to in the preceding paragraph, or carried out by members of such organizations, subject to the limitations and conditions laid down in the international conventions establishing the organizations or in the agreements on their headquarters.
  • Goods imported by the European Commission or by an agency or body established under European Union lawwhen these goods are imported in the performance of tasks assigned to them by European Union law in response to the COVID-19 pandemic.
  • Dentures imported by dentists or dental technicians, human organs, tissues and cells, blood, blood components and breast milk.
  • Textbooks and teaching aids, - textbooks, knowledge books and training kits approved by the Minister of Education and Science, as well as the supply of textbooks, knowledge books and training kits, when the goods are supplied by institutions in the system of preschool and school education under the Law on Preschool and School Education, institutions in the system of vocational education and training under the Vocational Education and Training Act, training providers for the acquisition of key competencies, included in a list approved by the Executive Director of The employment agency or cultural, educational or scientific institutions
  • Products of sea fishingrecovered outside the territorial waters of the European Union from ships, in ports in unprocessed form or after storage treatment for marketing.
  • Goods where importation is followed by intra-Community supply, and where the importer provides the relevant particulars and evidence of transport or dispatch to another Member State.
  • Gold from the Bulgarian National Bank.
  • Aircraft and vessels, as well as spare parts for them.
  • Investment gold.
  • Official publicationsissued under the control of the authorities of the exporting State or territory, and printed materials distributed under the conditions of elections.

And additional categories of goods that are specified in the law, such as goods under customs control which are destroyed or irretrievably lost, or goods that have been temporarily exported for repair or repair. These exceptions are designed to reflect different practical situations and to support international trade and cultural exchange without imposing an unnecessary financial burden on certain types of imports.

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